Fiduciary Obligations — Texas Probate Litigation (2022)

It is often stated that a fiduciary duty is the highest duty of trust and confidence under the law. General fiduciary duties include the duty of loyally and utmost good faith, as well as, the duty of fair and honest dealing. In addition, general fiduciary duties also includes the duty of full disclosure which requires disclosure of all important information concerning any transaction, including any matters that might influence a fiduciary to act in a manner prejudicial to the principal.

Fiduciary relationships may arise in formal or informal situations. In a formal relationship, the fiduciary owes heightened duties by virtue of his position or status. The status-based relationship itself will give rise to a fiduciary duty as a matter of law. Proof of the position or status is enough to prove the fiduciary relationship.

Formal fiduciary relationships include:

  • Trustee – beneficiary

  • Executor – beneficiary

  • Agent (power of attorney) – principal

  • Attorney – client

  • Partners

  • Joint venturers

In an informal relationship, however, the circumstances surrounding a transaction must be examined to determine whether one is acting as another's fiduciary. An informal fiduciary relationship exists “where there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard for the interests of the one reposing the confidence.” Family relationships, where a person trusts in and relies upon a close member of the person's core family unit, may give rise to a fiduciary duty when equity requires. Where a family relationship results in one person being accustomed to being guided by the judgment or advice of another or justified in believing the other will act in the person's best interest, a confidential relationship may arise.
A fiduciary typically owes the following general duties to the principal:

(a) The duty of fair dealing and utmost good faith.
(b) The duty of complete candor.
(c) The duty to refrain from all forms of self-dealing, which extends to dealings with a fiduciary's spouse, agents, employees, and other persons whose interests are closely identified with those of the fiduciary.
(d) The duty of fair and honest dealing.
(e) The duty of full disclosure of all important and/or material information concerning any self-dealing transaction.
(f) The duty to place the best interest of the principal above the interest of the fiduciary, and not use the position of fiduciary to gain any form of benefit for the fiduciary at the expense of the principal.

Fiduciaries must be careful when engaging in any transactions with a principal to whom they owe a fiduciary duty. The court will presume the transaction is unfair, unless the fiduciary can prove the fairness. Unlike most evidentiary presumptions, the presumption of unfairness involving a fiduciary self-dealing transaction is substantive and shifts both the burden of producing evidence, and the burden of persuasion with regard to fairness, to the self-dealing fiduciary.

In order to prove fairness, the fiduciary must show:

a. the transaction in question was fair and equitable to the principal; and

b. the fiduciary made reasonable use of the confidence that principal placed in him or her; and

c. the fiduciary acted in the utmost good faith and exercised the most scrupulous honesty toward the principal; and

d. the fiduciary placed the interests of the principal before his or her own, did not use the advantage of his or her position to gain any benefit for himself or herself at the expense of the principal and did not place himself or herself in any position where his or her self-interest might conflict with their obligations as a fiduciary; and

e. the fiduciary fully and fairly disclosed all important information to the principal the transaction[s].

In that situation, the fiduciary should be able to point to independent advice from an attorney or accountant regarding the fairness of the transaction. It is likely not going to be enough to simply point to the principal and claim, “he said it was okay.”

As examples, the following are examples of Texas court holdings regarding fiduciary obligations:

  • Stephens County Museum v. Swenson - the Texas Supreme Court held that beneficiaries' consent to transactions (and whether they had understood the transactions before giving consent) amounted “to a mere evidentiary inquiry [that] would not be determinative of the material issues those being whether [the fiduciary] had made reasonable use of the confidence placed in him and whether the transactions were ultimately fair and equitable.” 517 S.W.2d at 261.

  • Texas Bank & Trust Co. v. Moore - the Texas Supreme Court held that a gift to a fiduciary was invalid where the fiduciary did not refute evidence that the transactions were unfair or that the beneficiary was “confused” when she agreed to them. 595 S.W.2d at 509.

  • Slay v. Burnett Trust - the Supreme Court affirmed damages against a trustee who breached his fiduciary duties by procuring an agreement for the trust that unfairly benefited himself. 187 S.W.2d 377, 388-89

  • Miller v. Miller - the court invalidated a shareholders' agreement, notwithstanding that the beneficiary had received the agreement, “read it, signed it, and ... considered the agreement binding on her.” The court explained that the fiduciary was still required to “show that the transaction was ‘fair, honest, and equitable,”’ notwithstanding the beneficiary's consent. 700 S.W.2d at 947.

  • Sorrell v. Elsey - a finding that “Plaintiff made the gift freely, voluntarily and with a full understanding of the facts, and [that the fiduciary defendants] acted in good faith” would not absolve defendants who failed to show that they “made reasonable use of the confidence placed in them, or that the deed was fair and equitable … under the circumstances.” 748 S.W.2d at 586.

Trustees

A trustee owes the duty of loyalty to the beneficiaries to administer the affairs of the trust in the interest of the beneficiaries alone, and to exclude from consideration his own advantage.

  • A trustee may not make a profit out of his service as trustee other than reasonable compensation.

  • A trustee owes beneficiaries a duty of full disclosure of all material facts known to the trustee that affect the beneficiaries' rights.

  • A trustee has a duty to keep accurate trust records.

  • A trustee owes a fiduciary duty to preserve and protect the assets of the trust estate.

  • A trustee owes a fiduciary duty to administer the trust in accordance with its terms.

  • A trustee owes a fiduciary duty of fidelity that forbids the trustee from placing himself in a situation in which there is or could be a conflict between the trustee's self interest and the trustee's duties to the beneficiaries.

Executors

The fiduciary duties of an executor of an estate are the same as the fiduciary duties of a trustee. As trustee of the estate's property, the executor is subject to high fiduciary duties. As a fiduciary, an executor has a duty to protect the beneficiaries' interest by fair dealing in good faith with fidelity and integrity. His or her personal interests may not conflict with their fiduciary obligations to the estate.

The independent administration of estates and the testator's right to select an independent executor of his or her choice are foundations of Texas law. However, removal of an independent executor is possible for certain grounds enumerated in The Texas Estates Code. As alleged here, a trial court may remove an independent executor who is guilty of gross misconduct or gross mismanagement in the performance of his duties. The statutory criteria of gross mismanagement and gross misconduct are sufficiently narrow to exclude ordinary negligence, yet sufficiently broad to include a fiduciary's breach of his higher and additional duties.

Self-dealing can be generally defined as an occurrence in which the fiduciary uses the advantage of his position to gain a benefit at the expense of those to whom he owes a fiduciary duty.

Power of Attorney

The holder of a power of attorney owes the principal a fiduciary duty.

The elements of a breach of fiduciary duty claim are:

(1) a fiduciary relationship between the plaintiff and defendant;

(2) the defendant must have breached his fiduciary duty to the plaintiff; and

(3) the defendant's breach must result in injury to the plaintiff or benefit to the defendant.
In transactions between a fiduciary and a beneficiary, there is a presumption of unfairness and invalidity. A fiduciary is prohibited from personally profiting from his position; a fiduciary should never extract even a “good deal” for himself from his beneficiary.

There may be pre-existing personal or professional tensions between the fiduciary and beneficiaries. The existence of strained relations between the parties does not lessen the fiduciary's duty of full and complete disclosure in the administration of the estate.

Where a fiduciary relationship exists, the burden is on the fiduciary to show that he acted fairly and informed the other party of all material facts relating to the challenged transaction.

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