Burnett v. First Nat. Bank of Waco

• Decision Date: 15 April 1976
• Docket Number: No. 4867,4867
• Citation: 536 S.W.2d 600
• Parties: Clarence C. BURNETT, Individually and as Representative of the C & G Trust and Estate of Gladys C. Burnett, Deceased, Appellant, v. The FIRST NATIONAL BANK OF WACO, TEXAS, Appellee.
• Court: Texas Court of Appeals

Page 600

536 S.W.2d 600

Clarence C. BURNETT, Individually and as Representative of the C & G Trust and Estate of Gladys C. Burnett Deceased, Appellant, v. The FIRST NATIONAL BANK OF WACO, TEXAS, Appellee.

No. 4867.

Court of Civil Appeals of Texas Eastland.

April 15, 1976.

Rehearing Denied May 13, 1976.

Jack N. Price, Price & Williams, Austin, for appellant.

Minor L. Helm, Jr., Waco, for appellee.

RALEIGH BROWN, Justice.

The First National Bank of Waco, Texas, sued Clarence C. Burnett, individually, and as representative of the C. & G Trust and Estate of Gladys C. Burnett, deceased. The suit was predicated on Burnett's guarantees to the bank on debts incurred by C & G Trust of which the bank served as trustee. Burnett filed a counterclaim against the bank alleging the bank had failed to properly discharge its duties as trustee of the C & G Trust. Robert and Clarence E. Burnett, sons of Clarence C. and Gladys Burnett, intervened individually and on behalf of their children who were the ultimate beneficiaries of the C & G Trust asserting a like cause of action as alleged by Clarence Burnett in his counterclaim. The trial court directed a verdict in favor of the bank and entered judgment for $452,884.75 plus attorney's fees of $45,288.84 together with interest on the attorney's fees at the rate of 6% Per annum from August 26, 1974, and with interest on $28,464.43 at the rate of 7% Per annum from August 26, 1974, and interest on $424,420.32 at the rate of 8% Per annum from August 26, 1974. The judgment further authorized foreclosure of the bank's security interest in 11,017 shares of common stock in Franklin Life Insurance Company. Clarence C. Burnett, the intervenors and cross-plaintiffs were denied any relief. Clarence C. Burnett individually and as representative of the C & G Trust and the Estate of Gladys C. Burnett, deceased, appeals. No appeal bond was filed on behalf of any other party. We affirm.

The appellant presents sixteen points of error. Six of the points were not properly perfected. The remaining points urge two matters: (1) a challenge to the court's action with reference to the bank's claim against Burnett on his guarantees and his defenses thereto and (2) Burnett's claim against the bank as trustee for its failure to properly perform its duties as trustee of the C & G Trust.

The C & G Trust, established October 20, 1964, was a revocable trust at all times in question. It was created by legally competent adult grantors, Clarence C. and Gladys C. Burnett, dealing with community property with themselves as lifetime beneficiaries. Gladys Burnett died in 1971 and her interest vested in an irrevocable trust with her grandchildren as beneficiaries. The First National Bank of Waco was trustee. The Trust borrowed money from the bank and loaned and advanced money to entities owned and controlled by Clarence Burnett or persons associated with him. Loans were made by C & G Trust to Fidelity Finance Company, to an oil venture operated by the JPG Oil Company, to the M & B Development Company, to Wayne McKethan, and to Rudy Spell.

Fidelity Finance Company was a corporation in which Clarence Burnett was Secretary-Treasurer and owned one-third of its stock. Ed Burnett, a son of Clarence C. Burnett, was a director and owner of one-third of the stock. Rudy Spell, the President of the corporation, owned the remaining stock.

M & B Development Company is a land development corporation of which Clarence Burnett was President. Clarence C. and his son, Ed, are stockholders and Wayne McKethan was a business associate in the company.

Clarence C. Burnett had an interest in the oil venture operated by JPG Oil Company. He was a successful businessman having been in the insurance business for many years, being a C.L.U. Burnett had dealt in oil and gas, real estate, finance companies, and had served as a director of a bank for over twenty years. By instrument dated April 27, 1967, Burnett guaranteed 'the payment of indebtedness now existing or hereafter incurred by C & G Trust to The First National Bank of Waco, Texas, . . . This guaranty shall be without limitation as to amount, and shall be effective until written notice is delivered to the Trustee, to the effect that the undersigned, C. C. Burnett is no longer connected with the business enterprises being financed by said trust, . . .' No such notice was furnished the trustee.

The powers granted the trustee by the trust instrument were broad and specifically granted the trustee the power to deal with the First National Bank of Waco, to borrow money from said bank and to give such security as it may deem appropriate with respect to the loans.

Burnett contends the bank, as trustee, is liable to him, as beneficiary, for making loans to Fidelity Finance Company and to the JPG oil venture. He argues the bank failed to perform its discretionary functions as trustee because it did not exercise its own judgment before making the loans. We disagree.

The following is found in 128 A.L.R. 6 (1940):

'It is a well-established rule in the law of trusts, that a beneficiary may, by his consent, acquiescence, or ratification, be estopped to complain of a breach of trust by the trustee. In other words it would seem that the principles of estoppel apply to cestuis que trust just as fully as to persons in other relationships . . .'

See also Murphy-Bolanz Land & Loan Co. v. McKibben, 236 S.W. 78 (Tex.Com.App.1922, jdgmt. adopted).

The rule has support in the Restatement of the Law of Trusts § 216 and § 218 (2nd ed., 1959):

' § 216. Consent of Beneficiary

(1) Except as stated in Subsections (2) and (3), a beneficiary cannot hold the trustee liable for an act or omission of the trustee as a breach of trust if the beneficiary prior to or at the time of the act or omission consented to it.

(2) The consent of the beneficiary does not preclude him from holding the trustee liable for a breach of trust, if

(a) the beneficiary was under an incapacity at the time of such consent or of such act or omission; or

(b) the beneficiary, when he gave his consent, did not know of his rights and of the material facts which the trustee knew or should have known and which the trustee did not reasonably believe that the beneficiary knew; or

(c) the consent of the beneficiary was induced by improper conduct of the trustee.

(3) Where the trustee has an adverse interest in the transaction, the consent of the beneficiary does not preclude him from holding the trustee liable for a breach of trust not only under the circumstances stated in Subsection (2), but also if the transaction to which the beneficiary consented involved a bargain which was not fair and reasonable.'

' § 218. Discharge of Liability by Subsequent Affirmance

(1) Except as stated in Subsection (2), if the trustee in breach of trust enters into a transaction which the beneficiary can at his option reject or affirm, and the beneficiary affirms the transaction, he cannot thereafter reject it and hold the trustee liable for any loss occurring after the trustee entered into the transaction.

(2) The affirmance of a transaction by the beneficiary does not preclude him from holding the trustee liable for a breach of trust, if at the time of the affirmance

(a) the beneficiary was under an incapacity; or

(b) the beneficiary did not know of his rights and of the material facts which the trustee knew or should have known and which the trustee did not reasonably believe that the beneficiary knew; or

(c) the affirmance was induced by improper conduct of the trustee; or

(d) the transaction involved a bargain with the trustee which was not fair and reasonable.'

Art. 7425b--23, V.A.C.S. (1960) provides similarly:

'Power of beneficiary

Any beneficiary of a trust affected by this Act may, if of full legal capacity and acting upon full information, by written instrument delivered to the trustee, relieve the trustee as to such beneficiary from any or all of the duties, restrictions, responsibilities and liabilities which would otherwise be imposed on the trustee by this Act, including the release of the trustee from any or all liability to such beneficiary for past violations of any of the provisions of the Act, except as to the duties, restrictions, and liabilities imposed on corporate trustees by Sections 10, 11, and 12 herein. Acts 1943, 48th Leg. p. 232, ch. 148 § 23.'

The court in Slay v. Burnett Trust, 143 Tex. 621, 187 S.W.2d 377 (1945) said:

'. . . the established rule is that while a beneficiary's consent to an act of his trustee which would constitute a violation of the duty of loyalty precludes him from holding the trustee liable for the consequences of the act, the beneficiary is not precluded from holding the trustee unless it is made to appear that when he gave his consent the beneficiary had full knowledge of all the material facts which the trustee knew. In re Trusteeship of Stone, 138 Ohio St. 293, 34 N.E.2d 755, 134 A.L.R. 1306; Scott's The Law of Trusts, Vol. 2, pp. 1149--1153, Sec. 216; Restatement of the Law of Trusts, Vol. 1, pp. 609--619, Sec. 216.'

The evidence conclusively establishes Clarence C. Burnett was at no time during the period in question under a disability. He was an adult beneficiary of a revocable trust. Letters and instruments ¹ delivered to the bank by Burnett established his consent, acquiescence, ratification, and/or release of the acts of the trustee in making the loans to Fidelity Finance and to the JPG oil venture. The points of error are overruled.

Appellant further contends the trial court erred in rendering judgment in favor of the bank because the evidence raised issues of fact as to the gross negligence and constructive fraud of the bank in failing to (1) preserve, collect, and apply the proceeds of notes representing loans by Fidelity Finance, assigned to the bank as collateral security for loans to the C & G Trust, to the indebtedness of the C & G Trust to the bank; (2) in failing to ascertain...