Exculpatory Clause

Texas Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240 (Tex. 2002).


The court designated Original Trustee as the trustee of a trust created under Property Code Chapter 142 to manage settlement proceeds payable to Beneficiary, a minor, because of the wrongful death of Beneficiary’s father. Original Trustee invested the proceeds in its own common stock and taxable fixed income funds as permitted by applicable law and the trust instrument. Years later, Original Trustee and New Trustee entered into a bank swap agreement by which the two trustees exchanged all assets from two of its branches including their trusts. In compliance with Federal law which prohibits banks from investing in the common trust funds of other banks, each trustee liquidated the stocks and income funds in the other trustee and then reinvested those funds in fixed income and common stock funds managed by itself. Because of market conditions, these transactions resulted in a capital loss to the trust. Accordingly, Beneficiary sued Trustees for breach of fiduciary duty based on self-dealing and improper investment. Trustees defended on the basis of an exculpatory clause which read, “This instrument shall always be construed in favor of the validity of any act or omission of any Trustee, and a Trustee shall not be liable for any act or omission except in the case of gross negligence, bad faith, or fraud.” The trial court granted summary judgment in favor of Trustees.

The appellate court in Grizzle v. Texas Commerce Bank, N.A., 38 S.W.3d 265 (Tex. App.—Dallas 2001), reversed. The court reviewed the evidence and determined that New Trustee’s failure to promptly reinvest trust funds was evidence of mishandling of trust funds and may have constituted self-dealing. The exculpatory clause did not expressly relieve Trustees from liability for self-dealing. The court determined that because a fact issue existed whether Trustees engaged in self-dealing, the exculpatory clause did not support a summary judgment in favor of Trustees. Trustees appealed.

The Texas Supreme Court reversed. The court first addressed Beneficiary’s argument that the Trust Code was inapplicable to Chapter 142 trusts. The court found no support for this argument in either Chapter 142 or the Trust Code. Consequently, the court concluded that “a trust created under Property Code chapter 142 by the court acting as settlor is an ‘express trust’ to which the Trust Code applies.” Id. at 322.

The court then held that the exculpatory clause was sufficient to protect Trustees from liability for self-dealing, that is, “the misapplication or mishandling of trust funds, including the failure to promptly reinvest trust monies.” Id. The court based its holding on the clear language of the Trust Code which authorizes exculpatory clauses. For example, Prop. Code § 111.002 provides that the terms of the trust control over the Trust Code and that the settlor may relieve the trustee from the usual duties, restrictions, and liabilities except for certain acts of corporate self-dealing which Beneficiary did not allege. In addition, Prop. Code § 113.059 echoes this policy by providing that a settlor may relieve a trustee of the necessity of complying with any duty, liability, or restriction imposed by the Trust Code (except for the non-alleged self-dealing exceptions). The court rejected the lower court’s conclusion that public policy prevents enforcement of the provisions of the Trust Code which authorize exculpatory clauses.

The court next examined whether Trustees were within the scope of the exculpatory clause which did not provide protection from actions constituting gross negligence, bad faith, or fraud. The court examined the terms of the trust and the alleged improper conduct of Trustees such as selling trust assets and delaying reinvesting and concluded that those actions would constitute at most mere negligence. Accordingly, the trial court’s rendering of a summary judgment in favor of Trustees was proper.

Moral: Exculpatory clauses are an effective technique to relieve a trustee from liability for mere negligent conduct. The Texas Supreme Court’s unambiguous approval of these provisions should reduce litigation by disgruntled beneficiaries who claim a trustee acted negligently if the trust contains an exculpatory provision.

Note: Some practitioners have expressed concerns about the court’s broad approval of exculpatory clauses which could be interpreted to permit exculpation of “evil” trustee conduct such as actions taken in bad faith or with reckless indifference to the potential results. This fear may be overstated. First, the exculpatory clause in the case was limited to the exculpation of negligence and thus the issue of evil exculpation was not before the court. Second, the strong public policy against authorizing “evil” conduct should trump the settlor’s ability to exculpate this conduct.