Originally published by David Fowler Johnson.
In Adams v. Regions Bank, beneficiaries sued a trustee for multiple claims, including breach of fiduciary duty, arising from the trustee’s seizure of collateral owned by the trust. 2016 U.S. Dist. LEXIS 1027 (S.D. Miss. January 6, 2016). Adams, the primary beneficiary, borrowed $3 million from the bank before it was trustee and signed an agreement pledging the bank’s stock as collateral. Later, the stock was transferred into a testamentary trust created by Adams’ father for her benefit. Later still, the bank became the trustee of that trust. When Adams defaulted on the loan, the bank/trustee proceeded to seize the stock it held in the trust. Adams and her children sued the bank for breaching its fiduciary duty in having a conflict of interest and in failing to diversify the trust’s assets. The bank/trustee filed a motion for summary judgment, which the district court granted.
The court first addressed whether Adams’ children had standing to pursue their claims. The trust document provided that Adams was the primary beneficiary, and that she had a power of appointment such that she could completely cut her children out of the trust. Adams’ children offered no evidence from which the court could find that they had a present right to the remainder of the trust upon Adams’ death, and the court found that they failed to make a sufficient showing that they had standing.
The court next addressed Adams’ claims, which included the trustee’s failure to: (1) comply with the terms of the spendthrift trust; (2) protect trust assets from creditors, including the trustee; (3) assure no self-dealing at Adams’ expense; (4) avoid an inherent conflict of interest; (5) decline the trustee relationship due to a conflict of interest; (6) follow the trustee’s internal controls; (7) protect trust assets, especially as the trustee’s stock was declining in value; (8) adopt and follow a suitable investment strategy; (9) properly manage trust assets; (10) act in the best interest of the beneficiaries; and (11) comply with statutory obligations.
Regarding the non-diversification claims, the court granted the trustee’s motion for summary judgment due to a limitations defense. Mississippi has a three-year statute of limitations for breach of fiduciary duty claims. The injuries unrelated to diversification stemmed from the trustee’s position as the successor trustee over a spendthrift trust that would later hold the trustee’s own stock. That relationship was established no later than April 2009. So the question the court had to answer was whether Adams had met her burden of showing that she did not know, and could not have reasonably discovered, these injuries in the time that passed from April 2009 to August 7, 2011, the date the statutory window closed. The court noted that Adams signed many of the documents that set up the conflict of interest situation and participated in litigation to clarify some of those transactions. The court held that she did have sufficient information to timely file suit, and that her breach of fiduciary duty claim regarding the non-diversification facts was barred by limitations.
Adams’ diversification claim was that the trustee should have sold its own stock and invested in other, better assets. Adams’ father’s will stated that the trustee was “vested with the [] additional power[] . . . To retain, with no obligation to sell, any property coming into their hands as Trustees under the terms of this instrument, including stock in AmSouth Bancorp. [now the bank], whether or not the same would be treated as legal for the investment of trust funds and regardless of any lack of diversification or risk, without being liable to any person for such retention unless otherwise specifically provided herein . . . .” The will also stated that Adams had the power to order the trustee to sell any assets, but that the power had to be exercised in writing. Adams later signed a retention agreement with the trustee that provided that the trustee could keep the stock in the trust until Adams provided written notice that it should be sold. Even though Adams stated that she told the trustee to sell the stock, she had no evidence that such a directive was done in writing. Adams argued that the retention agreement was void because the trust was a spendthrift trust and she was the beneficiary. The court held that “while the spendthrift provision may have prevented Adams from using trust assets to secure loans, it did not bar her from exercising her authority to direct the trustee to sell assets-the subject matter of the Retention Agreement.” The court held that the will and retention agreement both allowed the trustee to retain the stock and not diversify until Adams gave written notice to sell the stock. As that was never done, the court held that the trustee did not breach its fiduciary duty in keeping the stock in the trust.
The court rejected other claims arising from the trustee’s seizure of the stock. Adams argued that the bank/trustee was in wrongful possession of the stock because of its “inherent conflict of interest” and because “Regions the trustee failed to protect the beneficiaries from Regions the creditor.” The court held that the bank/trustee had a legal right to do so under the loan documents and under a prior judicial proceeding in which Adams participated and that Adams was estopped to argue that the seizure was inappropriate.
Interesting Note: There are a lot of interesting facts and legal issues in this case. The standing issue was important because the court disposed of most of Adams’ claims on the limitations defense as she knew of the conflict issue in time to file her suit in the limitations period. The trustee may not have had similar facts to support limitations as against Adams’ children, who may have been able to timely raise their claims. Under Texas law, there is some doubt regarding the court’s standing holding. Texas Property Code 115.011 provides that any interested person may bring an action under Section 115.001. See Tex. Prop. Code Ann. § 115.011. Section 115.001 provides that a district court has jurisdiction over proceedings to appoint or remove a trustee, determine the duties and liabilities of a trustee, make determinations of fact affecting the administration or distribution of a trust, and determine a question arising from the administration or distribution of a trust, require an accounting by a trustee, review trustee fees, and settle interim or final accounts. Id. at § 115.001. “Interested person” means “a trustee, beneficiary, or any other person having an interest in or a claim against the trust or any person who is affected by the administration of the trust.” Id. at § 111.004(7). “Beneficiary” means “a person for whose benefit property is held in trust, regardless of the nature of the interest.” Id. at § 111.004(2). Section 111.004(6) defines “interest” as “any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible.” Id. at § 111.004(6). Accordingly, under Texas law, Adams’ children may have had standing, and limitations may not have barred their claims if they did not know about any of the facts that supported the fiduciary breach claims. See, e.g., Elliott v. Green, No. 05-94-01019-CV, 1995 Tex. App. LEXIS 3607, *11 1995 WL 437206, *4 (Tex. App.—Dallas 1995, no pet.) (not designated for publication) (remaindermen of a trust “had an interest in ensuring that the trustee committed no acts outside the Trust terms which would damage the Trust property” and had standing to assert a breach of fiduciary duty claim). Further, even if Adams’ claims were barred by limitations, in Texas she would still be able to assert a claim to remove the trustee as there are no limitations for such a claim. See Ditta v. Conte, 298 S.W.3d 187, 191 (Tex. 2009).
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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