Exculpation clause in trust cannot bar claim for breach of duty to act in good faith, but trust beneficiaries cannot sue for lost value to company held in trust and also failed to prove mental anguish.
Ruben S. Martin, III created a trust for the benefit of his children, Courtney and Robin, and designated his brother Scott as the initial trustee. Ruben funded the trust with shares of stock in the closely-held energy company that he and Scott jointly managed. The trust terms included an exculpatory clause that provided that restrictions on self-dealing and the duty of loyalty would not apply to the trustee’s dealings with the trust. Not long after the trust was created the relationship between Ruben and Scott turned acrimonious and each brother struggled to take control of the company.
In 2008, Ruben believed that the company required additional capital and sought to obtain a line of credit for the company. Scott disagreed and filed suit against the company and Ruben. As a result of the suit, which was disclosed to the prospective lender, the line of credit was cancelled. This forced the company to sell assets to raise working capital and resulted in a substantial decrease in the value of the company’s stock.
Courtney and Robin sued Scott for breach of fiduciary duty. The jury determined that Scott breached his fiduciary duties and awarded compensatory and mental anguish damages to each of Courtney and Robin. Scott appealed.
On appeal, Scott argued that he could not have breached his fiduciary duties to the beneficiaries because of the exculpatory clause in the trust agreement. The Texas Court of Appeals held that Scott owed certain non-waiveable fiduciary duties to the beneficiaries under the Texas Trust Code, including the duty to act in good faith and in accordance with the trust purposes, and there was sufficient evidence for the jury to conclude that Scott filed the Harris County lawsuit in bad faith. However, the court overturned the jury’s award of compensatory damages and mental anguish damages on the grounds that: (1) under Texas law, damages resulting from the devaluation of corporate stock are damages incurred by the corporation; (2) the beneficiaries, as equitable shareowners, had no independent right to recover damages for corporate losses, including corporate value decline; (3) Courtney and Robin failed to establish the high degree of mental pain and distress resulting from Scott’s breach of fiduciary duties required for mental anguish damages; (4) the beneficiaries’ mere disappointment, anger, resentment, and embarrassment was insufficient for this purpose; and (5) despite Scott’s breach of trust, the beneficiaries were not entitled to any compensation.