Texas Executor Breaches Fiduciary Duties In Making a Non-Pro Rata Distribution Of Assets and Failing To Disclose Material Facts

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In In re Estate of Stewart, a Texas executor was found to have breached his fiduciary duties in administering his father’s estate by making a non-pro rata distribution of assets.

The Facts of In Re Estate of Stewart

Decedent William Stewart passed away in February 2017.  Decedent left a valid will.  Decedent’s son, Wayne, was nominated as independent executor under the will.

William’s will granted Wayne the power to (1) sell, lease, or mortgage the whole or any part of his estate, at public or private sale, with or without notice, as he “shall deem best”; (2) hold, manage, and operate any property, business, or enterprise that William may have owned at the time of his death; and (3) borrow money on behalf of the estate. The will also granted Wayne all rights and powers granted to trustees under the Texas Estates Code.

The will provided for the residuary estate, which consisted of most of the $5 million estate, to be divided between Wayne and his three siblings – Jennifer, Trey, and Steven.  During the administration, Wayne did not disclose facts to Jennifer, causing Jennifer to mistrust Wayne.  Wayne and Jennifer also had several altercations at the family home, further increasing the mistrust.

In addition, Wayne, without telling Jennifer, deeded the family home to her, and deducted money from her share of the residuary estate for the value of the house.  Wayne did not tell Jennifer he was deeding the home to her, and did not discuss the value he charged for it.

Wayne also deeded a large parcel of property to himself and his two brother, but not to Jennifer.  He did not tell Jennifer about the transfer or send her a copy of the deed.

When Jennifer and her attorney requested information, they were informed that if Jennifer pursued her motions, she would risk losing her inheritance under the will’s no-contest clause.

In 2018 Wayne filed a section 405.003 Motion for Judicial Discharge. Jennifer objected and Wayne provided an inventory and accounting, which showed that Jennifer had not received the same amount as her brothers.  Wayne also requested court approval for a $150,000 reserve to pay his lawyers, but expended those funds prior to receiving approval.

The case went to a jury trial.  Wayne was found to have breached his fiduciary duties as executor to Jennifer.  Wayne was ordered to pay Jennifer’s attorney’s fees. Wayne was not granted a judicial discharge.

What Are a Texas Estate Executor’s Fiduciary Duties To The Beneficiaries?

The Texas court of appeals first discussed an executor’s fiduciary duties to the estate’s beneficiaries:

“The relationship between an executor and the estate’s beneficiaries is one that gives rise to a fiduciary duty as a matter of law.” “An executor’s fiduciary duty to the estate’s beneficiaries arises from the executor’s status as trustee of the property of the estate.” “The executor thus holds the estate in trust for the benefit of those who have acquired a vested right to the decedent’s property under the will.” “The fiduciary duties owed to the beneficiaries of an estate by an independent executor include a duty of full disclosure of all material facts known to the executor that might affect the beneficiaries’ rights.” “A fiduciary also ‘owes its principal a high duty of good faith, fair dealing, honest performance, and strict accountability.’” “When an independent executor takes the oath and qualifies in that capacity, he or she assumes all duties of a fiduciary as a matter of law which, in addition to other duties, includes the duty to avoid commingling of funds.”

Does The Texas Estates Code Allow an Executor To Make Non-Pro Rata Distributions Of Real Property?

Wayne relied on section 405.0015 of the Texas Estates Code to claim that he was permitted as the executor to make a non-pro rata distribution of the real property.  Section 405.0015 states:

Unless the will, if any, or a court order provides otherwise, an independent executor may, in distributing property not specifically devised that the independent executor is authorized to sell: (1) make distributions in divided or undivided interests; (2) allocate particular assets in proportionate or disproportionate shares; (3) value the estate property for the purposes of acting under Subdivision (1) or (2); and (4) adjust the distribution, division, or termination for resulting differences in valuation.

In response, Jennifer focused on Wayne’s failure to make disclosures to her and notify her of the non pro-rata distribution.  Wayne countered her argument be saying that his distribution of the real property did not impact Jennifer’s rights as long as she received an equal value of the residuary estate, and that his failure to inform Jennifer about what he was doing was not a breach of his fiduciary duties as independent executor under Texas law.

The Court of Appeals disagreed, stating:

In looking at the plain meaning of section 405.0015, it clearly grants an independent executor, unless otherwise limited, authority to make distributions in divided or undivided interests; to allocate particular assets in proportionate or disproportionate share; to value the estate property; and to adjust the distribution, division or termination for resulting differences in valuation. See Tex. Est. Code § 405.0015. However, section 405.0015 states nothing about divesting an independent executor of the fiduciary duties he owes the beneficiaries of the will. We agree with Jennifer that Wayne’s interpretation would lead to an absurd result. We also agree with Jennifer that it is not a coincidence section 405.0015 became effective simultaneously with the Texas Uniform Partition of Heir’s Property Act (the “Heirs Partition Act”). See Tex. Prop. Code § 23A.001 (effective Sept. 1, 2017). The Heirs Partition Act provides a streamlined process by which heirs can either force partition in kind, or alternatively effectuate the buyout, of undivided interests in inherited property. See Tex. Prop. Code §§ 23A.001-.013. We conclude section 405.0015 merely provides an independent executor with the tools necessary to make non-pro-rata distributions and avoid the common partition litigation among heirs anticipated and addressed by the Heirs Partition Act. Thus, the typical fiduciary duties of good faith, fair dealing, and full disclosure still apply to Wayne’s actions notwithstanding section 405.0015.

Failure To Disclose Material Facts = Breach of Fiduciary Duty Under Texas Law

One of the easiest ways to upset a beneficiary is a failure to communicate.  Much worse is failing to disclose material facts, which, according to the Texas jury resulted in a breach of the fiduciary duties of the executor.  The appellate court determined that there was sufficient evidence to support the jury’s finding, stating:

Wayne’s failure to timely disclose material facts to Jennifer affected her ability to challenge valuation of the Goliad Property. In addition to the Goliad property, Wayne admittedly did not disclose to Jennifer the nature of the securities distributed to her. Without this information, Jennifer could not establish the fairness or completeness of the distribution to her in lieu of an in-kind share in the Goliad property. We conclude there was evidence that Wayne failed to disclose to Jennifer material facts that might have affected her rights.

Also of note in this opinion is that even though Jennifer was found to have no damages, it didn’t matter, because Wayne received a benefit from his breach of duty.  Wayne received a larger portion of the estate because he chose to pay Jennifer less for her share of the real property.

The takeaway: if you are a Texas executor, treat the beneficiaries fairly and comply with your fiduciary duties of good faith, fair dealing, and full disclosure.  You are tasked with administering the estate in line with the decedent’s directives or Texas law, and for all of the estate’s beneficiaries – even the ones you do not get along with.