Beneficiaries Standing to Sue on Behalf of Trust
On July 27, 2015, the Fifth Court of Appeals in Dallas held that Texas law does not permit trust beneficiaries to bring derivative claims on behalf of the trust against the trustee or against third parties. Plaintiff Sandra Goebel was a unit holder in the Hugoton Royalty Trust created by XTO Energy Inc. Bank of America served as trustee. In 2013, Goebel demanded that Bank of America, as trustee, file suit against XTO and its subsidiary company Timberland Gathering & Processing and Bank of America for alleged wrongful acts that resulted in damage to the Trust. In January 2014, Goebel filed suit against Bank of America, XTO and Timberland “on behalf, and for the benefit of” the Trust. Goebel’s suit asserted that XTO and Timberland breached its duties to the Trust by operating under no-arm’s length contractual sale agreements that benefitted XTO and failing to renegotiate the contracts to reflect market rates. Goebel further contends that Bank of America breached its fiduciary duty by failing to monitor XTO’s conduct, failing to force XTO to renegotiate the contracts and failing to file suit because of a conflict of interest. The trial court found no evidence of wrongdoing by the trustee in deciding not to pursue a lawsuit against XTO or Timberland on behalf of the trust. Bank of America and XTO filed a petition for writ of mandamus and special exceptions contending Goebel lacked standing to bring the suit and could not usurp the trustee’s authority to determine what legal actions to pursue on behalf of the trust.
The Court of Appeals held that a trustee has discretion to determine whether or not to file suit on behalf of the trust. Courts should not interfere with this discretionary power and allow a suit to proceed unless the beneficiary pleads and proves that the trustee’s refusal to pursue litigation constitutes fraud, misconduct, or a clear abuse of discretion. Because Goebel’s petition failed to state a factual bases for concluding that Bank of American’s refusal to bring suit against XTO and Timberland was the result of fraud, misconduct, or a clear abuse of discretion, the Court of Appeals found that mandamus relief was appropriate.
Bank of America and XTO also contended that Goebel did not have standing to bring a derivative suit on behalf of the trust against the trustee. The Court of Appeals ruled that Goebel’s claims were not brought on her own behalf but were impermissibly brought on behalf of the Trust as a whole and usurped the role of the trustee to control the Trust’s involvement in litigation. The Court of Appeals concluded that the trust code permitted Goebel to bring claims on her own behalf not the Trust as a whole. This ruling allows Goebel to amend her petition to limit her claims against Bank of America, as trustee, solely to the units she owns.
Two key take away points: (1) The trustee has the authority and discretion to control litigation on behalf of the trust unless the trustee’s refusal to bring suit is a result of fraud, misconduct or a clear abuse of discretion; and (2) Beneficiaries may not bring derivative suits on behalf of the trust against the trustee but may bring suit against the trustee on their own behalf.
This case is In re XTO Energy Inc., 05-14-01446-CV, 2015 WL 4524197 (Tex. App.—Dallas July 27, 2015, no. pet. h.)