Harrison v. Harrison Interests, Ltd., 2017 WL 830504 (Tex. App.—Houston [14th Dist.] 2017, no pet.)
Any attempt by a trustee to enter into a contract with her beneficiary during the existence of a fiduciary relationship will be presumed unfair to the beneficiary and, quite possibly, void ab initio. The recent case of Harrison v. Harrison Interests, Ltd., 2017 WL 830504 (Tex. App.—Houston [14th Dist.] 2017, no pet.), is instructive regarding situations in which co-trustees of existing trusts attempt to obtain valid releases from their beneficiaries.
In Harrison v. Harrison Interests, Ltd., a beneficiary sued his co-trustees and co-executors, seeking a declaratory judgment and injunctive relief from completing the execution of previously negotiated settlement agreement. The trial court granted the co-trustees/co-executors motion for traditional and no-evidence summary judgment. The appellate court affirmed the trial court’s judgment in favor of the co-trustees/co-executors.
That Court began its analysis by recognizing the case-law history in Texas holding that transactions between trustees and beneficiaries involve a presumption that such transactions are unfair to the beneficiaries and thus invalid. Citing Keck, Mahin & Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692, 699 (Tex. 2000), the Court stated the issue was whether it was shown that the release of the co-trustees/co-executors from their fiduciary duties was fair or valid. Id. at *4. Citing prior cases, the Court noted that the principle that fraud vitiates a contract “must be weighed against the competing concern that parties should be able to fully and finally resolve their disputes by bargaining for and executing a release barring all further disputes.” (internal citations omitted). Similarly, the principle that fiduciary duties arise as a matter of law must be balanced with a court’s obligation to honor the contractual terms that parties use to define the scope of their obligations and agreements, including limiting fiduciary duties that might otherwise exist. Id. at *4.
The Court recognized that the agreement in issue was negotiated not just to premature distribute trust assets to the beneficiary, but also to terminate his relationship with his fiduciaries and to settle all claims against them. The release was necessarily required to sever such relationship. Id. at *5. The court articulated the importance of the following factors in determining the validity of a release, including whether: the beneficiary is “of legal age”; the specific terms of the release were negotiated; the beneficiaries were represented by qualified counsel; the parties dealt with each other in an arms-length transaction; all parties were knowledgeable in business matters; and the release language was clear. Id. at *5. Ultimately, after applying the factors, the Court found the factual record rebutted the presumption of unfairness or invalidity attaching to the release. Id. at *5.