To Whom Do Executors Owe a Fiduciary Duty?

A fiduciary is a person who holds a legal or ethical relationship of trust with another party. If a person is a fiduciary, they have what is called a fiduciary duty to that party.

A fiduciary duty can exist in several special relationships or circumstances and the type of duty that exists between a fiduciary and their party can vary. If a fiduciary breaches their duty, they may be liable for negligence.

This raises several questions when it comes to probate estates, such as when does a fiduciary duty exist and who is owed the fiduciary duty? The court answers these questions in Mohseni v. Hartman, 363 S.W.3d 652 (Tex. App.–Houston [1st Dist.] 2011).

Facts & Procedural History

In 2005, Ali Mohseni loaned Yadollah Mosadegh $150,000 in exchange for a promissory note. The note carried an 18% simple interest rate and was payable in monthly installments of $2,250.

Yadollah died in November 2005. After Yadollah’s death, Ali filed a claim for repayment from the estate in probate court. The probate court approved the claim, but it went unpaid.

The probate court appointed Gaye as executrix of the estate in January 2006. In October 2007, Hartman moved to withdraw and requested the appointment of a substitute independent executrix. The motion to withdraw stated that the estate had a value of $800,000, but that it was deeply in debt. The trial court granted the relief, and it replaced Gaye that month.

In April 2009, Ali sued Gaye under a negligence claim. He alleged that Gaye failed to pay outstanding payroll, sales, and property taxes owed for the Garson Restaurant, a property of the estate. As a result, he alleged, the estate incurred additional penalties and interest. Ali claimed that had Gaye not caused the estate to incur these extra costs, then the estate would have had sufficient money to pay his claim against it.

What is a Fiduciary and a Fiduciary Duty?

Under the Texas Estates Code, a fiduciary is a person or entity appointed to act on behalf of another person in a position of trust and confidence. Examples of fiduciaries include executors, administrators, guardians, trustees, and agents acting under a power of attorney.

A fiduciary duty refers to the legal obligation that the fiduciary has to act in the best interests of the person for whom they are acting, and to exercise reasonable care and skill in carrying out their duties. This duty requires the fiduciary to avoid any conflicts of interest and to act with loyalty, honesty, and good faith.

The fiduciary duty is a high standard of conduct, and any breach of this duty can result in legal liability for the fiduciary. There are a number of duties imposed on fiduciaries. Fiduciaries are required to keep accurate records, provide regular reports to the beneficiaries, and act prudently and responsibly in managing the assets of the estate or trust for which they are responsible.

The Texas Estates Code defines an “independent executor” as “the personal representative of an estate under independent administration.” This “administration” that the executor performs refers to the management of the estate of a deceased party. As trustee of the property of the estate, an executor is subject to the fiduciary standards applicable to all trustees. This means that an executor does have a duty of care to a trustee.

Examples of Breach of Fiduciary Duty

Examples of breach of fiduciary duty by a personal representative in a Texas probate case may include:

1. Self-dealing: The personal representative uses their position to benefit themselves at the expense of the estate or the beneficiaries, such as engaging in transactions that result in personal financial gain.
2. Misappropriation of assets: The personal representative misuses or misappropriates estate assets for personal purposes, including using estate funds for personal expenses or transferring assets to their own name.
3. Failure to account: The personal representative fails to provide accurate and timely financial statements and accountings to the beneficiaries or the court, making it difficult to monitor the administration of the estate.
4. Negligence or mismanagement: The personal representative demonstrates negligence or incompetence in managing the estate’s assets, resulting in financial losses or failure to fulfill their duties adequately.
5. Failure to distribute assets: The personal representative unreasonably delays or refuses to distribute assets to the rightful beneficiaries without valid justification, hindering the progress of estate administration.
6. Conflict of interest: The personal representative places their personal interests above the interests of the estate or beneficiaries, leading to biased decision-making or favoritism.
7. Failure to follow court orders or legal requirements: The personal representative disregards court orders, fails to comply with statutory obligations, or neglects their fiduciary duties as prescribed by Texas probate laws.
8. Failure to preserve estate property: The personal representative neglects to properly maintain or protect estate assets, leading to the deterioration, loss, or destruction of valuable property.
9. Failure to handle debts and claims: The personal representative neglects to identify and address valid debts and claims against the estate, potentially causing financial harm to the estate or compromising the rights of creditors.
10. Breach of confidentiality: The personal representative divulges confidential information about the estate or the beneficiaries without proper authorization, violating the duty to maintain privacy and confidentiality.

Remedies Available to Creditors in the Estates Code

The Texas Estates Code provides several remedies to creditors who are aggrieved by the mismanagement of an independent executor of an estate in Texas.

Specifically, as noted by the court in this case, sections 146, 147, and 149C of the Texas Probate Code (which is now the Texas Estates Code) provide creditors with the ability to seek removal of the independent executor and to make claims for payment, which can result in a judgment that can be executed against the assets of the estate.

In addition, section 149A of the Probate Code allows interested persons, including creditors, to demand an accounting from the independent executor after a certain period of time has passed since the appointment of the executor.

The court concluded that these provisions do not guarantee any protection for unsecured creditors against financial mismanagement or insolvency of the estate. Thus, creditors do not have any inherent right to be protected against the debtor’s poor financial management or inability to pay a debt, either during the debtor’s lifetime or after their death.

The court found that there is no fiduciary duty between a creditor of an estate, such as Ali, and the executor, such as Gaye.

Process for Filing a Claim for a Debt

The Texas Estates Code sets out a specific process for filing a claim for payment of a debt owed by the estate. This differs from suing a fiduciary for breach of their fiduciary duty. These are the typical steps to file a claim for a debt in a Texas probate:

1. Present the claim to the personal representative before the estate is closed, ensuring it is not barred by statutes of limitation. Alternatively, deposit the claim with the clerk, including vouchers, exhibits, and an affidavit. Include attorney’s fees if applicable.
2. For independent administrations, the personal representative must allow or reject the claim within 30 days and indicate their decision on the claim. Failure to timely allow or reject the claim constitutes rejection, potentially leading to personal liability or removal.
3. For rejected claims or claims in dependent administrations, file the claim with the county clerk, who enters it on the claim docket.
4. Interested parties can object to the claim, leading to a hearing and judgment by the court.
5. The court must act on each allowed claim within 10 days, approving or disapproving it and classifying it. If the court is not convinced of the claim’s justness, it conducts an examination and may disapprove the claim.
6. The court issues an order indicating the action taken on the claim, which serves as a final judgment.
7. Dissatisfied claimants or interested persons can appeal the court’s action to the court of appeals.

The Takeaway

This case shows that creditors of a probate estate are not owed a fiduciary duty by the executor. As such, creditors of an estate should file a claim in the probate case as soon as possible. They may also want to press the executor for payment sooner to ensure that their claim is paid sooner so that poor financial management does not result in the estate having no assets to pay the claim.

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Disclaimer 

The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.