THE LIABILITY OF FIDUCIARIES FOR BREAKING THEIR DUTI ES AND
STANDARDS -- WHO MAY ENFORCE SUCH DUTIES -- JURISDICTION
AND VENUE OF COURTS, AS TO SUCH ACTION
W,
REED LOCKHOOF
THE LIABILITY OF FIDUCIARIES FOR BREAKING THEIR DUTIES AND
STANDARDS -- WHO MAY ENFORCE SUCH DUTIES -- JURISDICTION AND VENUE OF COURTS AS TO SUCH ACTION
This paper is being limited to the liability of personal
repres~ntatives
and trusteeswpen they break their duties.
Consequently "the topical
divi8io~s
sentative and the Trus'tee.
will be the Personal Repre-
..
'Dhe
divisions
will be ' subdivided
,
,
,
into Texas law and then the law in general as related to each
topic.
The material will. largely be statutory with legal
periodicals and treatises being ,'used
•
~o l better'understand
how
the statutes are used or will be ·used. · Sinoe this is a broad
,
general area that is
be used.
~eing
~.
'
. covered very little case. law will
"
The topio, ,the Personal Representative, will include
a discussion about the independent
executor since a majority
,
,
.
of all testate administrations in Texas are or the independent
type.
Texas is one of the rew states that utilizes this. type
I'
or probate administration.
.
The Personal Representative
For purposes of this 'pap'e r' t~e term, p~rsonal repre-
"
sentative or representative,
wi~l ' include
executor, independent
executor, and administrator.
Texas Law Generally
The Te~as Probate, Code sets torth some difterent
-2-
sections as to when the representatlvewlll be personally
. ,
liable for a breach of duty. Section 245 states general~y
that when the personal representative neglects the performance .
.'
,
of any duty required of him, and . any costs are incurred as a
result, he and the surieties on
.
\
his
,bond shall. be liable for
all oosts so " incurred.
There are, other
more specific sections
.
,.
when the personal representative
is gw.lty of breaching duties
. ,
which are of sufticient importance that the code ~·p.cifically
.
\
covers them.
These areas
involve an "interested" person
gene~ally
filing suit against the representative when he has breached a
duty.
An interested ,person means hef.rs. ~ devisees,. spoUl!es,
credi tors, or any others having" a property right in, or claim
.
against the estate being administered.
covered are the following:
1
Some of these areas
when representative fails to use
due diligence in the collection of claims and recovery oJ
,.
property owed to the estate;
2
,
when representative fails to
pay claims when claimant is entitled .to payment upon demand of
.
"
the court, the representative must
. ~how the co~rt cause why
.
,
he should not be held personally liable and upon no showing of
good cause the court will render judgment against the representative personallY;~ when the representative fails to abide
by section 357 when selling land:;4 whe~ representativ~ is
.
renting or hiring out any ot
the
.
. real property of the estate;5
-3when the representative tails to give proper notice to holders
01' claims tor money against the estate. 6
Those interested ' in the estate are protected by the
,
administration bond trom
I
anY
loss occasioned by the wrongful
act of the representative
in converting
any part of the estate
,
,
to his own u;e or in 'wasting or mismanaging
the assets. 7
,
,
The independent executor even though he is designated
'
"
'I
'
as being a personal representative is different from a regular
executor or administraton.
section 3(aa) 01' the
This, becomes evident in reading
Tex~s
Probate Code ' in regards to who is
considered a personal representative. '
.
,
An
independent executor
,
is included in this qlassification., but in the second sentence
01' that section it states that the inclusion of independent
executors herein shall not be held. to subject such representatives to control of the courts in probate matters with respect
to settlement of estates except as expressly provided
J
. .
'
law.
b~
....
-
In Bell v. Still. 403 S.W.2d 353 (Tex. ' 1966) it was held that
the Texas Probate courts do
noth~ve
,
jurisdicti<m, to remove an
independent executor tor mismanagement and malfeasance.
f
l
'
·
"The
,
Texas legislatur~ resolVed the problem of the requisite amount
01'
court control by providing for a bond procedure.
Under this
procedure. when it appears that the independent executor is
mismanaging the estate. upon motion of a creditor or heir the
.
independent executor can be required by the probate court to
'
post a bond equal to double the value ot the estate.
only , it
-4the independent executor fails to give ·bond within ten days
after the order requiring bond can he be removed by the probate.
. court.
While this bond "procedure protects heirs and creditors
\
from a diminution of the c.o rpus of the estate, it does not
protect agaipst other instances of
m~smanagement
which, though
"
equally harmful to creditors and , heirs,
do not dissipate the
. ,
estate1s assets" such ,.as selir-dealing
and unduly prolonging
. \
'
settlement of the estate.
tl
'
,
"There is case authority that sup-
ports the proposition 'th&t a district court has the power to
grant appropriate relief( . based ,'upon lillegations that the
independent executor has withheld .f unds, dissipated the
estate~s
assets, or claimed 's8,le o~ership o,r ' property bel~nging to the
estate.
In 'OIConnor ' v.
OIConno~,
320 S.W.2d 384 (Tex. Civ.
App. 1959, writ ref1d n.r.e.), decided after the adoption of
the Code, the Court of Civii Appeals, in a suit for an accounting,
I suspended I the independent executor1s control over the
i
~state
,
and appointed a receiver to take charge of the property. The
.
.court intentionally avoided a dir~ct confrontation with the
.
,
oompletely,
,
"
issue of whether a district court has
the power
to remove an
, .
.
'
independent executor
.'
.
.
though the court1s order
appointing a receiver was tatamount to ·removal of the independent executor ... 9
"The primary argument against a removal power .in any
court is that independent ,exeoutors will be constantly brought
-5-
.
into court for removal on the allegation that they
should have
,
performed some act in a different manner, and thus the policy
of keeping the independent executor free of oourt supervision
\
will be obstructed • . Ourtailment ,of the independent exeoutor's
freedom of choice would not be the purpose or necessary result
of a removal
power.
,
A reasonable amount of discretion in
'
settling an estate, so long as
, the estate is being, settled, is
the crux of the ,system of independent administration, and it
is probabl," that interested persons would seek removal on,l y as
a last resort ~ecause of' ,the added oost~ and further delay in
settlement which litigation would entail.
Moreover, a oourt
would be able to dismiss summarily cases whioh obviously lack
merit, and this would serve to defeat frivolous olaims of
,
.
misconduct and avoid lengthy litigation."
10
This is not to say that an independent executor cannot
be held personably liabJ,e when:-he has breached one of his. duties.
!
"
The code sections that impose certain duties and standards that
r,) a personal representative must tol,low applies to
,"
executor or administ'r ator.
,
t~e
independent
This , if! true becaus"e to ' impose these
duties on the independent execul'0r. and to hold him personably
liable for a neglect of those dutie"s has nothing to do with
supervision ot the probate court, and being required to be
" subject to the same statutory standards and duties as an
exeoutor or administrator has nothing to do with the settlement
ot the estate per se. 11,
-6As to executors and administrators, section 222 of the
•
Probate Code states that the court, on its own motion or on
motio~
of any interested
perso~,
may remove any personal
representative if such representative falls into the
5
cate-
gories in subsection (a) or any of the 7 categories in subsection (b).
,
"
Section 4 of the Texas
, Probate Code sets out the
jurisdiction of t~e county c durt with respect to probate
proceedings.
The county' oourt has the general jurisdicti.on of '
,
.
a probate oourt. It has ' .the power to ·probate wills, appoint
guardians of minors and incompetents, grant letters of testamentory and of
admini~ tration
and of guardianship, . settle
accounts of personal 'repreElentatives,' and transact all business
appertaining to estates subjeot to administration or guardian' ship, includ:'. ng the settlement, partition, and distribution of
such estates.
The district c'ourt ha,s original
.'
jurisdict~on
.....
'
and control over executors and administrators under such regulations as may be ,p rescribed by
court has jurisdiotion to
the estate. 13
,
1~w.12 . For example the probate
qu.~tions
relating to olaims against
In the case of ap independent administration,
however, the district court, or the county
co~rt
not acting in
probate, has jurisdiction of all claims against an estate as
in any other cause of aotion
not~ regulated
by special ' ,statute . 14
As to jurisdiction of an action for the enforcement of claims
-7suit may be brought in the distriot oourt ,for its establishment,
it, under the general rules
01'
civil procedure, the court has
jurisdiction of the sub J,e ct matter of the actiion , such as
jurisdictional
amo~t when, the ' olaimis tor money. 15 Not only
section 5 of , the Texas Probate Code conters
originai juris'
,"
diction and control over the personal
representative but it
,
"
"
can also be tound in article .5', sec'
, t ion 8 of the Texas Consti";
,•
tution.
,
In 1'act it has been"held that the legislature c'annot
deprive the distriot court 01' jurisdiotion given by a constitutional provision. 16 ,
In Rider v. Fred C. Reeder, 415 S.W.2d 217 (Civ. App.
1967, reh. den.) it ' wps
the county 01' the
he~d
pe~sonal
that venue 'was properly 1'ixed in
residence 01' de1'endent administrator
rather than in the count;r' in which administration proceedings
were pending.
In an earlier' case personal residence rather
than the county 01' administration was held to constitute ,
proper venue. 17 Th:t'~ action alleged mal1'easanc~ by executors
in, their o1'1'icial capacities and
venue statute in Texas is
Ver~~ns
~emanded
,
an accounting.
The
, ,'
Ann. Civ.
St~t.
article 1995.
This statute has 'been ii1terpreted consiS:tently :in the manner
01' the above two cases; however, this statute in regards to
executors and
adminis~rators
is permissive in nature and the
courts oould probably rule i1' they wished that the personal
representative'oannot complain
it suit is brought in the oounty
,
'
-8of administration. 18
.
The Law in General (Speci1'ioally the Uniform Probate Code)
Section 3-712 states that if the exercise of power
concerning the estate is improper, the personal representative
is liable to ' interested persons for
~amage
or loss resulting
"
from a br,e a.ch of' his fiduciary duty, to the same extent as a
trustee of an express "trust.
principal
remedie~
! An ,interested
person has two
to forestall a personal representative from
committing a breach of 1'i'duciary duty.
h~ may apply t~ the court for
an
(1) Under section 3-607
order ~estrai:Oing the personal
representative from performing any spe'ci1'ied act or from
exercising any power ' in the course ·of
a.dminlstratio~.
(2) Under
section 3-611 he may ' petitlon the coUrt for an order removing
the personal representati've. 19
Section 3-713 states that any sale or encumbrance to
, the personal
.
repres~nta~ive,
!
.'
'his spouse, agent or
,
attorn~y,
or
any corporation ' or trust in which he has a subs.tantial benefioial interest, or any transaction which is affected by a
I
, .....
..
substantial bene.f ic:i.al interQst,. o.r ,any transaction which is
,
af1'eoted by a substantial
conr~ict
of interest on the part of
the personal representative, is voidable by
~y
person interested
in the estate except one who has consented after fair disclo'a ure,
unless (1) the will or contract 'entered into by the decedent
expressly authorized the transaction; or (2) the transaotion
-9is approved by the court after notice to interested persons.
So in essence if a personal representative violates the 'duty
against self-dealing a voidable title to the assets sold
.'
shall result.
In the Code "court" means . the
, court or, branch having
jurisdiction "in matters rel~ting to the affair's of decedents. 20
,
i.
'
._
.
Section l-302(b) dealing witlj,juriSdiotion states' that the court
,
,
has , full power to make orders, judgments and decrees and take
"
all other action necessary and proper to administer justice
in the matters which
com~before it~ ,
, Section l-303(a) dealing
with venue states ' that .where a pro,ceeding could be maintained
in more than one
p~ac,e,
the court in 'which the
pr~ceeding
is
first commenced has \he exclusive right to proceed; however,
in subsection (c) it goes: on to say if a court finds that in
the interest of justice a proceeding or a file should be
lo~
cated in another court, 'the court making the finding may.
,.
'.
.
....
'
transfer the proceeding or file to the ' other court.
The Code has one other important section when the
..
"
personal representative has breached ,a fiducia~ duty.
This
section makes it ' olear that a claimant whose ciaim has not
been b8l'l'ed may have' alternative remedi,e s when an estate has
been distributed subject to his claim. ' Under this section,
he has six months to prosecute an action against the
p~rsonal
representative'if he breaohed
, . · ariy duty to the claimant.
The
-10last sentence in the section emphasizes that a personal representative who fails to disclose matters relevant to his
liability in his olosing statement and in the aooount of
\
\
administration he furnished to distributees, gains no proteotion
from the 6 month period. 21
In regards to a foreign representative and the attaining
\
of jurisdiotion over him, seqtion
4-301 states that the foreign
,
,
'" to the jurisdiotion of the
representative submits himself
oourts of this state by (1) filing authenticated copies of his
•
•
I
•
•
appointment as provided 'in aeoti'on 4:"204, (2) reoeiving payment
of money or taking delivery of personal property under
section 4-201, or O}, doing any aot, as personal
re'p~esentative
in this state which would have given 't he state jurisdiction
over him as an individual.'. ,Jurisdiotion under subsection (2)
is limited to the money or value of personal property collected.
The
~ll
subse1il.ue~t
I
llaragr'a phs on,' the personal repre s~ntati ve
"
'
be dealing with the law in general and unrelated to any
speoific statutory material.
In many stat'es,
specilll ' courts, variously designated
,
'
as surrogate, orphans' "o'r probare .courts, have been established,
to which jurisdiotion of the admini"stration of estates hal!
been given. ' In other ,states, the oommon pleas oourts, county
courts" superior oourts, or other courts of general original
jurisdiotion are given jur1,acUo:tion in probate matters.
Some
-11statutes creating probate courts . have been drawn in such
•
mandator,. term" that the,. have been lI.on"trued as abrogating
the jurisdiction of equlty.22
\
In states where concurrent jurisdiction now exists
in probate courts and courts of equUy in the :administration of
"
estates, ,parties
interested, such as , creditors, may elect into
.
which court they will 'go. , G.nerally
the court that first takes
,
cognizance of the , matter will retain it to the exclusion of
others, unless, in the case of the probate court, some spetial
reason appears ., which shciws that " i t cannot administer adequate
and complete relief betw~en the parti.-s, making it necessary
,
.t o resort to equity. ~3
Pers'onal rep~esentative~ &reconsidered by a court of
chancery as trustees, and on this ground equity may exercise
jurisdiction over them in behalf of the heirs, devisees and
legatees, and credit,o rs ; to require ,the proper execution-, of
I
the "trusts".24
An executor or
'
administra~orwho negligent~y
•
'/
fails
. L
to collect assets ot . the esta.te'" or willfully defaults or
,
acts in fraud, is chargeable wi~h , the resulting lo~s sutfered
by the estate. 25 In the absence of a controLling statute,
or a protecting court , order, an exec.:utor is liable for losses
resulting from a tailure to settle an estate within the time
allowed by law'.26
A personal representative has been held
-12-
liable for a loss of estate funds where the loss was the result
of negligence or unjusti fiable delay in making distribution
after an order of dist r i bution. 27
"
A personal representative may be held liable for losses
to the estate resulting from his failure to exercise 'the
\
diligence expected of a prudent and cautious m'a n or from his
I
failure to ' use common skill and ordinary business , c'aution.
"
I
.
Thus a representative of a decedent estate is liable for
losses resulting from ,failure ·to insure the property of the
,
'
estate in a proper cafje and for penal til's suff.red by the
o
•
I
· ,
estate because ' ofthe representative's failure to file a tax
return in tlme. 28
Evell: though
~
exe,cutor or administrator acts in the
utmost good faith and believes that he is proceeding for the
best interests of the estata, his continued 'operation of a
business of the deceased . is a breaoh of trust unless he is
expressly authorized by' will ' or an or.der of court, or a .
statutory provision permits him ,to do so, and he becomes
personally liable for all debts ot ,the business and any losses
inourred. 29 Even if ' the auth~r'i'ty' fa conterre~ by a will or
by the court, an executor will 'still be personally liable for
losses sustained due to his fault or negligeoce. 30 Where all
the interested parties in an estate 'agree that a oertain course
should be followed, the exeoutor or administrator ' will generally ,
-13be relieved from personal liability if ·disaster follows. 31
. To be relieved of this liability the executor must show "that
the consent given was g~ven upon ' full and fair representation
\
and information co~unicated by 'him to such interested
, 32
persons.
~ personal representativ, who places money for
,
investment ' contrary to , directions, in
the decedents will or in
. .
\
violation of governing statutes,
will be held liable for losa
'\
'
of the money so placed. 33
The representliti.v.e is personally liable for the
damages or injuries resufting from hi? negligence in administering the estate and this couid include any injuries or
damages resulting frQm the, represell;tative1s neglie;ence in
~roperty .of· the estate in ~epai~.34
failing to keep the
The representative
can
be" held . liable personally for
,
,
mismanaging, misapplying, or wasting the assets of an estate
(known as devastavit).3~ , Some jurisdictions have held ~hat
./
....
there can be no devastavit until an order to pay creditors
has been made by the
probate court
by the
,
, and violated
.
,
.
,.--
~
there have , been judicial
decedents I representative, or, until
.
,
"proceedings resulting in a jUdgme~t 'against th~ · representative.36
;
In case of a conversion of , the assets of an estate, the
executor or,· administr!ltor is chargeable with the highest value
that can be placed on the converted property; also he is
,
-
chargeable
with interest o~
.
.
, the money, or, instead of interest,
.
-14he may be held accountable for any profits realized: trom the
use ot the money.37
When the representative does not exeroiseordinary
care and estate funds are stoleri, he is personally liable tor
a 10ss)8
Normally in the absence otwilltul misconduct or fraud,
a representative is not chargeable
with dereliction of duty
,
",and ' a resulting l,?ss to the ~'state where he has followed the
advice of counsel respecting proseoution or defense of liti"
'
.
I
'
..
gation; howevez: . relianoe' ,on suoh advioe is not always a oompletle
proteotion. 39
The Trustee
Texas Law
The Texas Trust Act was singularly unhelpful in trying
to determine the liability for the breach ot his duties and
standards,
It becemb ne'cessary 'Ix> finq. out what the common
law of Texas is in regards to the -liability of a trustee for
breaching his duty,.
Trustees 'are not : agents', but .principals:, and .are
thus charged only with duties and obligations to the beneficiaries for a breach of duty.4 0
.
If the negligent conduct -of iitigation results in the
beneficiary's
108S
of the ' cause· of aotion the trustee becomes
liable for any damages the benetioian Might reason~ly
have recovered. 4l
-15A trustee who has collected a
comm~ssion
or bonus
or has otherwise made a protit tor himselt out of the property
or tunds of the trust or ',in performance of his duties as
\
fiduciary is required to account 'to his beneficiary tor it.
The profits so made belong to the beneticiaryand tor his full
protection , he may have the use ot , the constructive trust as
a remedy.4 2 The beneficiary ~ay
, r~cover even thougn he has
suttered no damages and even though the trustee may have acted
in good falth. 43
"
Althou~ a benetic.iary' s ,'c onsent ',t o an act
ot his trustee
that would constitute avlolation ot the duty of loyalty precludes
him trom holding the trustee liable"the, beneficiary .is not precluded
from holding the trus~ee ~ess it can be shown that when he gave
his consent the beneficiary had full knowledge of all the material
faots that the trustee knew. 44
Wi th ' certain exceptions affeo~ing oorporate trust~es,45
/
a trustee aftected by the Texas Trust Act may, by provisions
'
in the instrument creating the trus,t , be relieved trom any or
all of the duties, restriotionll"responsibilities, and liabilities
,
'
imposed on ' him under theaot.
4.T~e
6 'benefioiary" may,
,tull legal oapaoity and aoting on full
informa~ion,
it of
relieve
the' trustee as to suohbeneficiaryfromany or allot the
duties, restrictions, responsibilities, and liabilities, imposed
by the aot. 47
The courts may also relieve a trus,tee trom any
or all of the duties, limitations, and restrictions placed on
-16him by the Texas Trust Aot, or wholly or p,artly release and
excuse a trustee who has acted honestly and reasonably £rom
, 48
liability
£or violations ' o£ the provisions o£ the act.
,
'
The trustee can be, held personally liable £or £ailure
~
or neglect
investing.
Unreasonab~e
delay in the invest-
ment o£ £unds, where 'the settlor, ha.s directed investment or
\
"
reinvestment, must be ,'8,VOideqi' ot,herwise, the :brustee will
\
be personally chargeable with interest. 49
There has been a
~ecent
case which is directly in
point with liability o£ 1(rustee ,'£or ' £ailure or 'neglect in
investing.5 0 Actually ·this case i :s very important in regards
\
to the liability o£ the
and £or that' reason
tr~stee
~his
-
,
£or, other breaches, o£ duty,
case , shall be examined in depth.
It
encompasses ten £indings .on a trusteels liability when there
has been a breach o£ duty.
£irst point the court,' states, our Supreme_ Court
/
....
o£ Texas has long recognized the reasons why a bene£iciary is
On :1;;11.9
not required to p~ove actual £rs.ud to recover £rom a de£alcating
•
trustee.
.--
liThe ~le '£orbiddi~'. c~n£lict between interest and
.
duty is no respecter o£'persons. It ' imputes constructive
.
£raud, because the temptation to aotual £raud, and the £acility
o£ concealing it, are , so great.
And it imputes it to all alike,
who come wi thin its scope, however much or however li t .tle open
to suspicion
or
actual
rr~ud.
Equity does not so much consider
-17~
the bearing or hardship of its ,d octrine up,o n particular cases
,
as it does the importance of preventing a general public:
mischief, which may be b~ought about by 'means secret and
inaccessible to judicial scrutiny, from the dangerous influences
arising from , the confidential relati9n of the parties.
The
, principle applies, however innocent
the purchaser may be in a
,
given cas~~,,5l
'
The court goes on to quote the rule that was expressed
by Justice Cardozo.
"Many fol'llls of conduct permissible in a
workaday world for tho's e ' ,acting at 8.l'Ill' S length, are forbidden
to those bound by fiduciary ties.
A trustee is held to some-
-
,
,
thing stricter than the mo:.;als of tne' market place ,.
Not honesty
alone, but the puncti'lio of an lionor the most sensitive, is then
the standard of behavior. ' A,S to this there has developed a
tradition that is unbending and inveterate.
Uncompromising
rigidity has been the courts of equity
when petitioned to
,
,
1'...
,
undermine the rule of undivided loyalty by the disintegrating
.
,
erosion of particular exceptions. , Only thus has the level of
-
conduct for fiduciaries been kept
, . at
. ,a ,level higher .,than that
,
"
trodden by the crowd. It will ~ot, consciously be lowered by
;
any judgment of this ~ourt.,,52
this court is when
pe~sons
The rule in Texas as stated by
enter into fiduciary relations each
, consents, as ' a matter of law, to -have his conduct towards the
--
--
other measured by the stanllards of the riner lOY,a lties exacted
-18by courts of equity. , That is a fine rule 'and
s~ou.ld
not be
whittled down by exception.~3
The second point made
~s
that the question of liability
of ,a defalcating fiduciary can be ascertained as a matter of
law without ~eference to a jury.~4 •
The thir'd
poin~
is that the exoulpatory language of a
I
trust instrument purporting , ,to relieve the trustee, from liability
,
except for gross negligence and
ba~
faith could not be used to
excuse the trustee from ~isapplication or mishandling of ,trust
fundS.~~ The court felt ' the correct rule of law to be:
trusteels powers are
, broad, but no • "
~
..• stipulation of
"The
the
declaration is susceptible of the construction that. the trustee
is
pr~ vileged
benefit.
,
to use the trust property or credit for his own
While he is to be ' held responsible, lonly for his own
wilful and corrupt breach of trust and not for any honest
error of judgment, I ,l he has no interest
in the trust or fts
,
'
property other than a managing interest, and such interest as
ownership. tI ~6.
may be evidenced by a certificate',
. of
,..'
The fourth point is that tt would be contrary to the
' ,'
.
:
.
public policy of this state 00 permit the language of a trust
~
instrument to authorize self-dealing by a trustee.~7
quotes Bogert Trust and Trustees, 2d Ed. section
~43
The court
(J),
p.~48.
liThe trustee may
violate ' the , duty of loyalty by lending trust
,
funds to himself'. As lender it is
his duty to get best terms
,
-19possible as to interest, seourity, andmat,u rity.
As debtor
his impulse is naturally in the direotion of getting the
money at the lowest rate, and often on other terms not advan\
tageous to the lender.
I~he
lends to himself, he cannot give
ad~quacy
an impartial , judgment as to the
of the security offered.
"
IIIf there is no formal 19 an, but a trustee mingles the
trust funds with his own
and~ses,
them in his private business,
-,'
\.
the ·transaction can be treate'd as a breaoh of trust on either
of two theories, namely" that of conversion of the trust
property, or disloyalty. 11,5 8
Point five in the case is that ' it is encumbent upon the
-
,
trustee to put trust .-t.'unds , to productive use and the failure
to do so within a reasonable period of time oan render the
trustee personally chargeable with interest. 59
.
Point six and seven dealt with tolling the statute of
limitations so as to baz''" recovery by 'the beneficiary fro~ a
/"
trustee.
....
,
'
The court held that there must be a clear and unmis-
takable repudiation of the trust QY
the trustee and.. such
,
. .60
repudiation must be brought h9~e , t~ the beneficiary.
The
"
.
,
repudiation must be plain, strong,. and unequivocal;
additionally
.
~
this repudiation must be an open repudiation, and to be sufficient and
effective~ust
ficiary to be repudiated. 61
have been , understood by the beneIn this oase tho trustee stated
unequivocally that he had Jlotrepudiated the trust.
-20Point eight explains that when the ,beneficiary has
knowledge
ot
,
the trustee's tailure to invest trust funds will
not necessarily relieve :.the trustee -from liability since
there was a fiduciary relationship rather than an arm's length
transaction.~2
.'
Point 'nine
oontinuing in 1'he, same line of thought
from the
pr~ceding
paragraph .lstated
that the fiduciary relation,
ship must be taken into accoUnt ,in determining whether the
beneficiary exercised 'the- requisite degree ,of diligence to
enable him torecover 'frqm the defalcating trustee. 6 )
Point ten involves the right of' the trustee to have
any
,
prop~r '
,
setoffs o:n
would include a sum owed
b~
,
consi,d ered. , This "right of , setoff
cred~ts
the ' beneficiary to ,the trustee even
though the transaction was completely unrelated to the administration of the trust. 64
By way of dicta or the settin,g of guidelines on retrial
,i
",
the court also pointed out two other considerations:
court felt that if
.
itwas'8stabli~hed
(1) 'l'he
on retrial that the trustee
mixed and mingled trust funds with his and other private funds,
.
I
.'
,
'then the burden of proof is on the trustee to segregate the
privately owned property from that ,which was held in trust;
(2) If the trustee has, not steadfastly performed his fiduciary
duties, he is not entitled to re'ceive anY" compensatio~ for his
, services (the court cites ,Bogert Trusts and Trustees, 2d Ed.,
-21"Power ot Court to Reduoe or Deny Compimsation i ' ,se.o't ion 980.
p. 404 and gives some explanatory illustrations: • • • oompensation has been retused where the trustee tailed to use
\
ordinary oare in his administration. • • • tailed to keep
proper reoords ot trust
property"
,~
administrat~on.
• • • tailed to invest
"
• • mingled trust property with his own.. and • • •
beneticiaries in that he acted
was guilty ot disloyaity to the
,
for ' his own selfhh interest 'j, 65
A great
dea~
ot time was spent on this case. but it is
very important trom the 'standpoint ot ' showing the courts'
philosophy in Texas toward the trustee: who has breached his
tiduciary duties. lind this , is their philosophy today.
I1' the
\
trustee finds himselt in court tor a breach ot duty, he will
find that the Texas courts are going to look upon him with a
very jaundiced eye.
In Texas any lower, ,v ested ,in ,t hree or more trustees
may be exercised by a majority ot such trustees, but a trustee
who has not joined in exercising
~
power shall not .be liable
to, the beneticiaries' or to others tor, the consequences ot such
,.
exercise. nor shall a dissenting trustee be liable1'or the
consequences of an act in which he 'joins at the direction 01'
, the majority trustees,. it
he~xpressedhis
dissent in writing
to' any ot his co-trustees at or be1'orethe time
joinder. 66
ot such
This is not to' 's ay that a co-trustee is excused
-22-
from liability for failure to discharge his duties as trustee. 67
The remedies of the beneficiary against the trustee
who ' has breached one of )1is fiduciary ' duties is the next topic
\
to be discussed. ' In some cases $.court ot equity will appoint
a receiver
0+, trust
property in the hands of the trustee.
Thus
,
a receiver has been appointed where
the trustee was insolvent,
,
where the trustee had misapplied
the trust fund, imd where he
. ,
'
.
has .allowed trust property to be wasted by a trespasser :
It
, is said that a receiver may be appointed where the trustees
omi t to aot, repudiate
t~eir
trust, . or :i-etuse to act:
A
receiver, however, will not be appointed where ,some less drastio
remedy, such as the
•
remova~
•
ot a
truste~
and the appointment
of another, will su1'ficiently safeguard the fund from spoliation and mismanagement. 66
~he removal ot a trustee is an
appropriate remedy where the ' trUst is a continuing one with
sufficient grounds for removal and as it is authorized by the ,
,i
....
Texas Trust Act. 69 The court under its equity power has broad
discretion and may order removal
~ven
.
though the trust instru-
ment does not provide for torfeiture of the ' office ot the
f
trustee.7°
,
beneficiary.
'
,'
,
.
The injun~tlon .1s a .very 'important remedy of the
It may be granted to protect,
th~
trust estate
, trom dissipation by an, insolvent trustee, to prevent any contem,
plated violation ot the rights of · benefioiaries, and ,t 'o prevElnt
.
trust property tram being
~old
at the instanoe ot the trustee's
-23creditors.
Relief by injunction in trust .cases is usually
ancillary to other relief, such as accounting or restoration
of mi sapplied funds. 71 ',The beneficiary can sustain a money
.
\
judgment against the trustee.
becomes chargeable with the
In such a suit the trustee
valueo~all
the trust property
"
that has come into his hands, ansi c,omI,>ensation to the estate
,
'.
being also recoverable
for , ~y
lqss growing out of neglect to
"
execute the trust.
\
A tru sted may be charged with ·conversion
of the trust property 'whe're he has so mingled trust funds
with his own that it, is '~mpossiDle to , t~ace them into any
specific property, or where he haa. invested trust funds
,
,
improparly, or where ,the
,
b~neficiar.y ; h~s
elected ,to charge his
trustee wit!l damages ' instead
,
.of'· pursuing property into the
.
72
hands of the person who !lad , acquired it .
The beneficiary
has the remedy of election when the trustee has made an i mproper
investment in land.
The"
beneficiary · may
'
elect whether to h<ild
'
', .,
..
.
the unfaithful trustee personally responsible, to claim the
/
,
land, the fruits of the
misapprop~iation,
and in the event of
an excessive
purchase price ~o'l.d. the
.
. " trustee for the difference
between the contract pr1:ce and ,the reasonable market· value. 73
The effect of an election of remedies that
t~e
beneficiary has
against the trustee and against any .third person who is not an
innocent purohaser (provided property can be traced) is that
the choioe of remedies
ar~ . conourrent,
at leaso in the sense
-24that , the , benefioiary 'may pursue the 'p roperty with a ' prayer
for alternative and fUrther relief against the trustee; 'and
neither the trustee nor ,the "innocent ll purchaser may complain
"
\
of the exercise by the berieficiaryot his option in seeking
Actually" where the action ot the
sarne particutarredress.74
"
trustee has been.
consoiously tortious towards the beneficiary,
\
'
'.
.
...
,
he may be entitled to ,both 'damages
'a nd restitution ot profits
\
'
made. 7
.5
:
Under the attirmat1ve defense ot the dootrineot
laches (where it is aIle&ed
theqerieficiary has been
tha~
negligent or careless in enforcing his rights by suit and to
allow this claim now ~ould work a grave ' injustice on the
,
"
'
4
trustee) the ' trustee 'DlUst prove ' extraordinary oircumstances
since the tour year period prescribed by the statute ot
limitations is comparatively· short. 76 Also as previously
discussed in the Shamburger case laches cannot be impute!.i
i
unless the trustee Under
an
...
express trust has openly repu-
diated his obligation and that th~ benei'iciary has knowledge
ot the repudiation ; , In addition the statute ot limitations
in an action tor
,
"
breach. ot
,
I
•
,
.
.
,
trust wil1 not begin to run until
the breach ot trust is discovered or should be discovered by
the use ot ordinary diligence. 77..
The distriot court has original jurisdiction to. determine the powers, responsibilities,
duties, and liability ot a
,
'
,
-25trustee, and to require accounting by the ,t rustee and to sur•
charge him. 78 This is true even though the property was
settled in trust
bywil~,
at least where the question is not
\
:
of a character ordinarily decided in the course of proceedings
in a probate , ooart. 79 Infaot where, a trustee : acts under the
.'
direction of a oourt 't hat does nqt possess the necessary
jurisdiction at the time i1; lIIakes, an order, the trustee may
. ,,'
i "
be held 1 iable for losses resulting from his act ons.
courts of Texas may have
~urisdiction
80 ·
The
to declare a trust
affecting extras tate prop-erty as' agilinst a defendant who is a
resident of Texas; since, under c'ontlict of laws, the citizen,
'.
ship and residence of, the c;lefendant# ' 'n ot the situs, of the
~.'
property, is ' the dete'rminil'1g f.actor ' as to whether
iI.
court of
equity should exercise ' jurisdicti~n (~~SBon being that its
judgments and decrees can be' enforced in persomm~.81
other issues involving proper' jurisdiction are:
,I
'
,
"
Two
(i) whether
•
there is a trust obligation or a mere contractual liability,
,
,
and this is determined according 1;0 the law of the state in
and
which the transaction took place
,
. .,where the ~roperty
.
.
affected is situated; (2) the l~w ' , of the testat'or' s ' domicile. '
,
' .'
determines whether parol testimony 'is adm1ss1,? le to establish
, a trust in land in thi,s state purchased with proceeds of· ,land
.
'
82
in another that had allegedly been devised in trust • ..
In cases where ther,s, is a single trustee,the venue of
-26such actions shall be in the county ot the residenoe ot such
trustee; or if a corporation, in. the county of its principal
place \of business, ' Whefe ther.e are two or more trustees, then '
the venue shall be in .the ·county · where the principal .office
of the trust' is maintained,83
It ' has reoently: been held that
"
section 24(B) does not by its terms cover suit brouSht for
,
conversion of trust assets, tor torts ot trustee, or for
.
•
damages for fraudulent acts by
\ .
.
and others against
tru~tee,
beneficiaries of trusts,' Suit was brought in this case for
the purpose of , removing trustees and to recover damages for
conversion of trust assets by ·trustees and third parties, and
•
,
~
I
the court held that venue was prope'r ly ·laid . in. the oounty ot
,
.
residence of two of the party defend~ts,
84
Law in General
The trustee is chargeable with any loss which results
trom a breach of trlst, , A trustee c'ommits a breach of trust
if he violates any duty which he owes as trustee to the beneficiary,85
In the .Uniform Trust ~ct it states that it a
trustee violates ' any of, .the pZ;ovisions ot this :Act, he may be
removed and denied compensation' in whole or in part; and any
beneficiary, co~trustee, or successor trustee- may treat the vio-
,
lation as a breach ot trust,
86
A .trusteecommits a breach of trust,however,even if
.
.
he does the best he can, if his best! "is not good e~ough,
He is
-27under a duty in administering the trust to exercise:
, such
care and skill as a man or ordinary prudence ,w ould exercise,
and
h~
is liable for a loss resulting from his failure to
comply with this standard , even though he does the best he
can. 87
The
, question often arises whether a trustee is liable
.
for breach of trust where he ,lacted under a mistake of law.
Where the trustee , fails to perform his duties, it is no defense
that his failure was due' 'to a mistake of law if he was ne,gli,
88
gent in making , the mistBke.
A more difficult ,question arises where the trustee
was not negligent and his mistake or law was due to . the advice
of counsel.
,
,
-
Whether he incurs a liability depends upon the
character of his mistake.: Where the trustee, makes a mistake
of law as to the extent of his duties or powers because of the
advice received from an .. 'at,torney, who was competent or wJ:?o
/
...
the trustee believed to be competent, he will be held liable.
.
The extent of the duties and
powers .of . a trustee is determined
,
"
by the rules of law 'which are" appl;!.cable to the situation,
,
,
and not the rules which the truptee or his attorney believes
to be applicable, and by the terms 'of the
t~st
as the court
may interpret them, and not as , they
may be interpreted by the
,
,
trustee himself or by his attorney.
The trustee can , eacape
this result by submitting .the matter to the oourt for its_ _
-28instructions. and he can thus avoid the ri sk of acting on his
own opinion
01' 01\
tiltl\\) or hi n attorney.
trust~e
the mistake of the
It seems that where
is not as to what are his duties
\
and powers as trustee. but ' .1s ,asto whether a particular act
is wi thin
tho~e
duties and powers. he, incurs no: liability if
he acted on advice otcounse1 and , he was not personally at
tau1t. 89
"
'
In a number ot cases i t has been held that 'a trustee
is not liable tor fa11tng ,to take legal proceedings against
a third person whex:e he
a~ted
under adviCe of counsel, even
,
though the advice of counsel was based on a misconception ot
the law.
.
,
,
Where the , t:nustee , acts witpout, proper pru,d ence '
under the circumstances, he , wi11 "be held liable.
,
For example
there are cases in which the trustee has been held liable
for neglecting to bring
suit. ~ or
:1.n refusing to accept money
paid into court. on the ground that under the circumstances
his conduct was unre~sonabi'e. 99
No one except a beneficiary, or one suing on his behalf
"
can maintain a suit 'against the, " trustee
to enf'or.ce the trust
. .
or to : enjoin or obtain r~dress for a breach , ot trust. 91 I f
:
there are two trustees. one ot them ,canma1ntain a suit against
the other to compel him to pertorm his duties ,under the trust
or to enjoin him to redress a breach ot trust committed, by him.
A trustee can m~intain such, a sUit 'a gainst },lis co-trustee even
92
though he has himse1t participated in the breach ot trust.
-29A transferee of the interest of a beneficiary can
~aintain
a
suit against the trustee to enforce the trust or obtain redress ·
for a breach of trust (he would be suing in effect in behalf
of the beneficiary's interest).
A creditor of a beneficiary
who · acquires 'a, lien upon his . interest is to
th~t
extent a
person whq succeeds to the interest ·of. the benefici9:ry and
he can maintain a suit " agains~ the trustee so far as this is
• his interest.
necessary for the protection of
A personal
representative of a deceased beneficiary, or a guardian of
,
,
a beneficiary who is under an incapaoity, oan maintain such
a suit. 93
,
,
The older more orthodox
view
in
the United States is
,
that a court 'does not ' act on its'· own initiative in protecting
rights or enforcing duties • . There is, however, a modern
tendenoy for a oourt which has supervision over the administration of trust estates to ·enforoethe duties of trustees
./
. ....
even though not called upon by the beneficiaries to do so.
The notion seems tq be that it is ~he
fUnction of the court
, ,.
.
.
to see that the directions of one
. . settlor are carried out,
,
.
even though no one oomplains to~he court of the trustee's
.
failure to do so; to see that the court has administrative
powers as distinguished from strictly judicial powers; and that
,
once the court acquires jurisdiction over the administration of
,
the trust, it is the
.
funct~on
or
theoourt to see that the
trust is admimistered in accordance with the directions of the
settlor. 94
.
-)0-
The Restatement 2d on Trusts handles very well the
liability of a trustee in his 'dealings with trust ;roperty95
or the purchasing ot property with trust· tunds. 96 It also
explains how a trustee who ·.1s ·liable for a loss occasioned
by one breach, of trust. cannot reduce ,the amount. of his
.
liability by deducting the amount , ot.. gain which has accrued
through another and distinct
breach
of trust; but if the two
.
'I
•
,
\
breaches of trust are not distinct, the trustee is 'accountable
"
only for the net gain or .chargeable only with the net loss
resulting therefrom. 97 .
The trustee can ·be relieved from his liability by
the beneficiary in
,
di~terent
one method is by
the con'
"
the consent does not preclude
..
the benefic.1ary was under incapacity at the time
sent ot the beneficiary;
him if (a)
ways.
however'~
of the consent or when such act or omission took place; (b) the
beneficiary, when he gave: his .consent, did not know of hi_s
"
. .
'
rights and of the material facts Which the trustee knew or
should have known and which the t~stee 'did not reasonably
believe that the beneficiary kn'ew; (0) the consent of the
.
f ,
•
beneficiary was induced by impr~per conduct of the trustee. 98
The trustee may also be relieved of .liability by a release or
contract with the same , exceptions as .t he oonsent exceptions
thereby preventing the trustee fram being relieved of ~iability.99
,
The same is true of liability
by subsequent atfirmance with
. ,
some exceptions. lOO The law in general on releasing ' the
trustee ot lisbility because the beneficiary is guilty ot laches
is the same basically as Texas law. 10l
The trustee can
be relieved ot liability through
~lso
cour~.
a discharge by decree 01' the
The beneticiaries will be
barred from s,uit by the settlement aIld approval by the court
"
of the trustee1saccoUnts.
In geperal the settlement of an
account renders res judicata !Ul Illatters in dispute and all
,
"
matters which were open to dispute although not actually
~ilty
disputed; however, if the ,trustee .is
concealment or
misreprese~tation.' in
of fraudulent
presenting his account
or in obtaining the approval of the court, then the court will
,
,
,
tQe ' beneficiarie~
re-open the case and at that .time
will be
able to hold 'the trustee liable 'for breach ot t ·r ust. 102
One common method :ot. relieving the trustee from certain
kinds of breaches of trust is the use of eXCUlpatory provisions
in the terms 01' the
trust~
,"
pr~visions
These
are strictly-
...
construed by the courts, and the trustee will be relieved of
.
liability only to the extent to wh~chit is clearly provided
that he should be relieved.
,
..
"
In .a number ot cases the courts
'
have held that the breach ot tru,st . committed by ·the trustee
was 01'
s~ch
a character (where 'breach was
co~tted
in bad
fai thor intentionally . or with reckless '· inditference to the
,
interest ot the beneficiary or where ·trustee has derived a
profit from his' breach) that
it '.
did .
not fall within
the kinds
,
.
of breaches of trust from which it was intended to relieve
him. 103
-32There has been of late years a growing feeling that
it is improper for a professional trustee at least, who professes
to give careful and skilltul service, to escape liability for ·
\
failure to· afford such serVice.
There is a growing feeling
tqat certain ~uties and standards of ponduct are appiicable to
"
the relationship between trustee and
, ' beneficiary, and that
these are so necessarily inhe~ent ~n the relation that they
,
cannot be dispensed with by ariy provision in the trust instru-
ment.
However, at the preBent time in the absence of a state
statute suoh provisions' az:o not regarded I,t o be against public
policy if they merely relieve the 'trustee trom liability for
ordinary negligence.i~~
Generally a
suocess~r
trUstee 1s not guilty for his
predecessor's breaches of ,t rust.
The exceptions to this
general rule are where (1) the successor trustee permits a
continuation of the breach (where his , predeoessor improperly
,.
,
purchased or retained property and the successor continues to
retain it); (2) he neglects to
-
tak~
proper stepB to compel hiB
predecessor to turn over trustprope;ty
to him;
,. . ,
,0)
he neg1eots
"
'
. redress a
' to take proper steps to compel his predecesBor
to
,
,
' lOS
breach of trust committed by him.
'
Normally where .there are two or more trustees, one of
,
them is not liable for a breach ot, trust oomm1tt,e d by the other •
.
.
Where there are , two trustees, and a breach ot trust is oommitted
by one ,ot
them,~he
other 1s liable it he is himself guilty ,of
-33a violation of duty to the beneficiaries.
lhis is the case
(1) where he partioipates in the breaoh of trust; (2) whe're he
improperly delegates the ',administration of the trust to his
co-trustee; (3) whereby his. failure to exercise reasonable care
has enabled
h~s
,co-trustee to commit phe breach. of trust;
"
(4) where he approves 'or acquiesces
, .in or conceals the breaoh
of trust; or (5) where .·h e neglects
to take proper steps to
. \
"
..
,
oompel his co-trustee to redress the breach of trust.
106
'
'Where ' several trus.t ees are- iiable for a breach of
trust committed by thelli J<?intly, .'or to,,"
a
breacn of trust
committed by one of them for which the others are liable
under the principals' fl,tated in the prececiing
paragraph,
they
' .
'
.
are jointly and severally liable', to the
beneficiarie~. 101
Some special attention should be paid to the liability
of the trustee for breaching 'an investment duty.
In the
absence of special circumstances, a trustee is under a dupy
"
..
....
'
to make the trust property productive, that is, to invest the
trust funds in
inco~e
producing pr?perty of an approved kind.
The terms of the trust,
Or the
"
.provi~ions
'
of th~ applicable
.
,
statutes, court rules, or court orders will determine the
specific property or the type of investments which should be
purchased.
By statute , in a few states ·a · trustee who fails to
invest is liable for simple interest only if his failure was
negligent, but for compound, interest it he was guilty of a
- wilful .breach of trust.
If the dut,. ' 6t the trustee was to
-34invest in one or the other of the investments permitted by a
statutory list, the diffioulty of proving damages to the
capital acoount from a failure to invest seems difficult and
\
would probably be fatal to such a claim.
The beneficiary is
not entitled ,t o 'pick one item on the .list and say that his
,>
trustee
s~ould
have selected that, investment and that a large
appreciation in the value of
been' produced.
~he
.i
Qapital would hav'e thereby
\
As to loss of "income the case is easier, ' for
the court can take testimony as to the average yield of legal
items on the lht, or resort to
imates the same result..
an
inter~st rate which approx-
If, as ina large percentage of
-
modern trusts, the trustee ,is governed by the prudent investor
rule, or is gi ven
diseretio~
as 'to the making or investments,
similar obstacles arise as tp the capital damages, and similar
.
,
methods of fixing income lossoan be used 108
,
,
Query -- does the trustee have ,'the duty to diversify
,
.
In discussing this 'question courts have
;'
trust investments?
'
.
' .
'.
"
taken divergent views.
One school., of thought, which proceeds
"
,.'
on the theory of ,distributing ,the risk
of loss, . supports the
'
.
proposition that a trustee, as a prudent man, is, under the
,
"prudent investor rule,"possessed of a duty t.o diversify
suoh investments; the ,o ther school, which evidently takes the
position that a laok of diversifioation in trust investments
may be evidenoe that a trustee has failed to exeroise proper
~killand
prudenoe, supports the proposition there is no
-35mandatory duty on a trustee to diversify investments:.
oa.es supporting the proposition th a t
duty
t~
,
In
a trustee 1s under ' a
diversify .trust investments, trustees have been held
liable for losses occasioned by the investment of too large a
proportion
o~
the trust property in
~
particular corporate
securi ty, ,or in securities of a specifio 10oal1 ty, or in
real estate mortgages,
" althou~
i17- some cases the 'circum-
\
\
stances have been ,said to be auch
as to relieve the trustee
.
from liability for losses -due to his failure to effect diversification; and it has ' aillo been ' rec-ogn1'zed that the provisions
of the trust instrument may exonerate the trustee from lia,
. .
bility for losses resulting from hi~ failure to diversify
_. trust investments.
Where the vfew is · taken that a trustee is
not required to diversity __ t~st investments, it has been held
that lack of diversification'in and of itself will not amount
to negligence for which
. ,-the trustee should answer; howev~r,
,I
.... '
failure to comply with trust instrument provisions mandating
,
diversification apparently
result~
.
in liability.
where the trustee has been held . liable
for
the trust investments,
,the
-
In cases
rail~re
to diversify
courts have usually taken the
position that the -trust is liable only for such loss as
results from a certain investment of trust funds beyond the
.
amount which might properly have been invested.
109
The Restatement of, Trusts 2d says that exoept as
otherwise provided by thete1'Dls ot the trust, the trustee is
-36under a duty to the beneficiary to distribute the risk of loss
by a reasonable diversifioation of investments, unless under
'the oircumstances it is prudent n~t to do so.110
-,
'
The factors
the trustee should consider in making a diversification of
investments il' (1) the purposes ' oftbJ! trust; (2) the amowit
"
of the trust estate; (3) the financial
, - and industrial con' ditions; (4) the type of inyeqtmeqt, whether mortgages, bonds,
,
or shares of stock; (5) distri bution as to geographical location; (6) distribution
maturity. 111
a~
to industries; (7) the dates of
The Restate~ent (Trusts 2d ') has had a great
influence in shaping the law relating to the duty of a trustee
.
,
to diversify trust in'lliestments.
,
Thi,s -influence is ,p robably
due, in part at least; to the fact that the reporter, Professor
' Austin
w. Scott(also author of Scott on 'Trusts'), is one of the
recognized authorities in the field of trusts.
Section 228 of
Restatement has been ,c ited in 'n umerous cases, and it is sub,J'
o
....
mitted that it reflects the modern view' as to investment
practices. 112
One particular remedy
mentioned.
0 '1 ',
,
I
a b'~neficiary should be
•
,
This ~emedY is the right of the ben~ficiary in
tracing trust funds.
Tracing is founded on the idea that the
beneficiary or his representative is the owner in equity of the
property which is sought to be taken.
Ownership connot_e s a
property intere~t in an identified
or identifiable thing.
,
,
It is a fundamental notion 1n the common law that a -change of
-31torm in a thing which is owned does not change the ownership •
.
So, it a person is the benefioiary of a trust under which cash
is held, and the trustee :, ileposits ' this trust cash 'in a bank in
\
his personal bank account. · .the benericiary's equitable title
is. transrerred,
'at his option, trom t)1e cash to· the claim
,
.
against the bink held in the name , o~ the trustee. It is also
"
commonplace in our legal
theo~y
tqat the owner or
"
entitled to the product or th~t whiCh is his.
a
thing is
\
So, 't he equi table
owner of trust property ougnt to be and is entitled to that
which arises out of the t ·t :ust property ,by sale, 'exchange, or
otherwise.
01' course tor the oourts to' recognize this right of
'
,
.
the benericiary the tri\lst property
,
m~Bt
be
traced s .t ep by step
.
in the dealings 01' the trustee, and it he can, .it makes no
difrerence how many changes · in form nave occured or what the
nature of the substitute trust property nowis. 113
In some cases whel'e the beneri'ciary cannot trace the
i
,
trust funds because they have passed into the hands . of bona
.
ride purchasers, or . have been diss~pated, he is given by equity
a remedy which is of some
theory.
.
value~
.but
is rounded on a dirterent
.
There are' two stibstitut~s for tracing • . One is called
subrogation where equity sanctions the result
~f
"subrogating"
the beneficiary to the rights 01' the mortgagee whose debt was
paid and encumbrance was removed by the use of the beneficiary's
trust funds.
Subrogation to, . the rights 01' an unseoured creditor
. -38of the trustee would not improve the beneficiarr-is standing
as .a claimant.
The applioation of this doctrine is ·based on
no complex line of reaso~ing, but ·merely · on the simple view
\
that under this doctrine justice ·will be achieved.
The other
doctrine used, to· substitute tracing ip marshaling.
Marshaling
is· the equitable doctrine that,
to be paid from two funds
one creditor has a right
w~ere
o~ ~ tems,
of property, and a second
,
creditor has a lien upon only -"one of these funds o~ pieces
of property, the first 'creditor will be compelled in eq\lity,
~r
unless it will cause him
athi'rd person serious damage
or inconvenience, to resort first 'to his exclusive means of
,
.. collection. ' For examp.le:
If
A has '
a ;tirst
mortgage on lots
,
.
,
.
one and two, and B a second mortgage on lot two, the court
will require A to foreclose on lot" one firs·t and satisfy his
claim as far as possible out 'of the proceeds of that lot.
Thus, it C is beneficiari'of a trust under which T is tru.stee,
.
-
,.
'
,
.
I
-
.
and the latter holds negotiable bonds as part of the trust res,
.
and pledges them
t~
!, a personal creditor of !, to secure an
antecedent debt trom ·! to X, and, X already has as security for
-
f
l
-
.
the payment of this debt' a chattel mortgage on ~ personal
household goods, under the rule s or ,marshaling.. f should resort
first to his exclusive ,meansot collection ot his claim against
!, namely, to the chattel mortgage, and only secondarily to the
pledged trust bonds, which
~t
is assumed !has taken innocently
-)9-
and for value.
If in violation ot his
dut~
under the marshaling
theory. X tirst uses up the pledged bonds, and then sells the
household goods under th~mortgage. and has a balance ot cash
\
2. should be subrogated . to the rights which ! formerly had und~rthe chattel mortgage., and 2. should be given
lett over.
a lien on the "surplus 'oash left trom the mortgage foreclosure.
,
I
..
,
. . .
-
This enables C to procure a part ot 'what he would have received
it his rights had not been cut otf by the transfer ' of the bonds
to a bona fide
p~r~hase·r.l~4
It is a little 'la'11e in the paper ' but it . should be pointed
out that the right ot abenefioiary. to .amoney judgment against
,
,
,
the trustee is not a p,reterred olaim,. 'in. the abseno,e of a
statute.
He stands on the ·level · with ,Other creditors ot the
trustee; however. the b~ne,ficiary is given an equitable lien on
the product ot the breach ot the trust as shown from the
earlier paragraph on tracing. lIS
".
...
The Restatement 2d on trusts says that exoept as stated
th~
in section 198, the remedies ot
beneficiary against the
116
trustee are exolusively
equitable.
.
,
. . . It the trustee is under
a duty to pay money immediately '~d uncondition~lly to the
'
beneficiary and/or if the trustee of. a chattel is under a duty
to transfer it immediately and unconditionally to the bene,
.
ficiary and in breach of trust fails to do so, the beneficiary
can maintain an action of law against him. 117
•
remedies ,Of the beneficiary are:
The equitable
(1 Y t.o compel the trustee .
-40to perform his duties as trustee; (2) to enjoin the, trustee
from oornnrl.tting a breaoh of trust; (3) to compel the trus'tee
to redress a breaoh of trust; (4) to appoint a reoeiver to
\
take possession of the trust property and administer the
trust; (5) to,remove the trustee. 118 ,
.'
Courts of · equity have the , right to exeoute supervisory
oontrol over
trus~,
and
the~r
,
jurisdiotion is generally
deemed to be exolu~ive unless \ jurisdiction has been oOnferred
on other oourts by local practioe, or oonstitutional or
statutory provisions. ll9
Venue is subjeot to statutory provisions. In a proper
,
. ,
case a suit to estab11~h and, enforce, a trust
may b~ brought
,
.
in the 'oounty! in whicli the t?rust ' res is situated, but generally,
.
suoh suit is regarded as t ,r ansi tory , and may be instituted in
.
the county in which the trustees reside, or in which jurisdiction may be had of the" trustee. 120 ,
.'
•
"
J
FOOTNOTES
1.
~. 2!!.~. Probate ~~. ~ 3(r) (h:ereinafter
ci ted as :ITQ).
2.
I'd.
H 233.
3. : Id. ~ 328(p).
Id. ~ 358
s
5. Id. s 360,
s
6. l Id. s 297.
4.
7 •.
. 8.
H 362,
.!
~ 363,
10.
B 366.
s
18 Tex. Jur.2d 322, s 374 • .
..1;); p ., ., Smi.th,. Fiduciary
-- A:dministra tion
, Adnrl.nistratlon
.
of Estates, 45 Tex. 1,.
9.
364',
!i.
353' (1966-67).
Id. 355.
Id.
357 ~
11. . M. K. Woodward, Some : Developments in the Law of Independent
~.L •.
Administration, 37
R. 833 (1958-59).
12.
:ITQ ~
13.
Story v. Story, 176 S. W.2d 925 (Tex. 1944, reh. den.) •
14.
Rowland v. Moore, 174 S. W.2d.
15.
18 Tex. Jur.2d 496,
16.
Moyers v. Callter, 61 S. W.;;!d .1 027 (Civ. App. 1933, reh. den.).
17.
Kelly v. Lobit, 142 S. W.2d 301 (Civ. App. 1940).
18.
93 ALR2d 1217 (1964).
19.
Uniform Probate ~ (1969)
5.
..
-
oited as
,
~).
248 (Tex. 1943, .reh. den.).
~ 637 ~'·.
,
·K 3-712
oomment (her.einafter
20.
UPC ~ 1-201(5).
21.
22.
Id. ~ 3-1005 comment.
s
31~. Jur.2d 35, s 22.
23.
Id. 36, ~ 23.
24.
Id. 37, ~ 26.
25.
Id. 106, ~ . 188.
\
\
26. :l!!. 107," ss 189 • .
, .
27. Id. 107, ~ 189.
28. , I d. 117, ~ 218.
29.
Id. 118, 119, ~ 220...
30.
Id. 120, · ~ 221.
31.
l!!. 121,
32.
Id. 121, ~ 222'.
33.
l!!. 123" . ~ 228 • .
34.
~. 138, ~ 263.
35.
Id. 138,
36.
Id. 138, ~ 266.
37.
Id. 139,
38.
l!!. 139, ~ 269.
39.
Id. 139,
40.
Perry v. Long, 222'5. W.2d 460 CCiv. App.:1949 reh. den.,
~ 222.
B 265.
~
268/
H 269. '
err. ref.).
41.
Lipsitz v. First ,Nat.
Bank, · 288 SW '$ 09 (Civ. App. 1926,
'
mod. on other grQunds).
42.
57 ~. Jur.2d 541"
.. -
B 160:
43.
Slay v. Burnett Trust, 187 S. W.2d 377 (Tex. 1945, reh. den.).
44.
Id. 390.
45.
The Texas Trust ~ .
"
B 10--1
12 (1968) (hereinafter ·cited as
!!!) .
46.
-Id.
ss 22.
47.
Id.
B 23.
,
48.
Id. ss 24(E ).
49.
57 ~. Jur.2d 533, ~ , 1lt8.
,
,
-
.,
~ ,
\
50. , p. P. Langford v. C. D.\ ShSJnburger, 417 S. W,'2d 438 (Ci v.
App. 1967, reh. den .. , application for writ of error refused,
no reversible ' errol')
•
.
"
51.
g.
52.
Id. 443.
53.
Id. 444.
54.
g. 444.
55.
Id. 444.
56.
Id. 444.
57.
59.
g. 444.
g. 444.
g. 444,
60.
Id. 445.
61.
Id. 445.
. 62.
Id. 445 •
". 63.
Id • 445.
58.
. ..
443.
64.
g.
65.
Id. 444.
446.
445. '
66.
TTA ~ 18(A).
67.
Id. s 18(e).
68.
57 Tex. Jur.2d 594,
69.
11!
i 217.
H119,
~ 117, as to removal and
as to appointment ot a
successor.
70.
Phoenix Oil Co. v. MCLarren,
I
,24!I-
S.
w'.
830 (Civ. App.
1922, reb.. den.).
71.
I
57~.
s
Jur.2d 595, s , 218.
72. , Id. 596-597, ~ 220.
73.
l!!. 597, ~ 221. ' ,
74·
Id. 598-599, H 224.,
75.
rd. 600, ~ 224.
76.
rd. 607-608,
77.
rd. 610 T
78.
TTA ~ 24(A).
79.
57 Tex. Jur. 2d 580-581,'
i 80.
H'
~30.
H232. ,
-
g. :(58.1-582,
i 206.
"
~ 206 .."
81.
rd. 582, ~ 207;
82.
Id. 582-583, ~ 207.
83.
11! i 24(B).
84.
Mayflower Trust Co'. ' v. Norvell, ' 413 S. W.2d 783 (Civ. App.
1967, reh. den.).
8,5.
Scott, Scott
~
s
'
Trusts s 201 (3d. ed. 1967) (hereinatter
cited as Scott); See also l ~ Restatement
2!
Trusts2d, ~ 201
(1959) (hereinatter cited
as Restatement2d).
,
86.
Uniform Trust
87.
Scott
88.~.
s
20, 90
B
u.
L. A. 301.
B 201.
i 201; see alllO Relltatement2d 201 comment (b).
90.
B 201.
Scott B 20l.
9l.
Restatement2d
92.
Scott
93.
~.
B 200.3.
94. ' Id.
S 200.4.
89.
~,
sc\ott
B200;
see also 'Scott Bs 200.
"
95.
B 200.2.
B 20"8
Restatement2d
tbr selling trust property and
,
,
a 209
tor falli~ to ' sell ' 't rust properti. '
96.
~. B 210 tor purchas,ing prop'ertyimd B 211 for failing to
sell trust property.
,
B 213; see also acc.ompany1ng comments to B 213.
98. Id. S 216.
97.
~.
99.
Id.
a 217.
100.
g.
ss 218.
10l.
Scott
102.
g. B 220.
103.
Scott s 222.2; see also R,statement2d s 222 and R. C. Grull,
B 219;
see also
s
B 219.2
supplement (1970).
. ,
s'
,
,
'
Exculpatory Clauses Invoked , by the Individual Trustee, 5
-lll.
Oontinuins ,Leg. !!!. 99 (1967).
B 222.3.
104.
Scott
105.
s
Scott R 223; see also Restatement2d s 223.
106.
Scott II 224; lIee also Restatement2d 1 ' 224 and 65 ALR2d
1019 (1959).
a 224.6.
107.
Scott
108.
Bogert, Trusts and Trustees 8 702 (2d. ed. 1960) (hereinafter c1 ted Bogert2d). '
109.
24
110.
Re'statement2d
111.
-Id.
112.
ALR3d 730 (1969).! '
.
H228
.
I
a.ealao Scott
...
comment (b).
\
24
ALRJd "730.
,
Bogert2d
921.
'
113.
K 228;
B
114. ' ,Id.
g 930.
11.5.
~.
B 862.
116.
Restatement2d 8 197.' ,
117.
~.
B 198;: see also Scott 8'198.
118.
~.
B 199;
120.
!.!!. 8 4.5.5.
see 8.l..so Soott' 8 199. ~
,
'
119. ' 90 £:!§. 8, 4.54 (195.5).
-
8
228.