in Re: XTO Energy Inc., Timberland Gathering & Processing Company, Inc., and Bank of America, N.A.
471 S.W.3d 126
Tex. App.2015Background
- XTO Energy created the Hugoton Royalty Trust in 1998; Bank of America is trustee. The Trust holds net profit interests entitling it to 80% of net proceeds from certain oil and gas sales; units trade publicly.
- Sandra Goebel, a unitholder, alleged XTO and its subsidiary Timberland diverted approximately $60 million in royalties by using affiliate sale arrangements and sued “on behalf of, and for the benefit of” the Trust after the trustee refused her demand to sue.
- Bank of America, after review by outside counsel, concluded the conveyances gave XTO "sole and absolute discretion" to amend or continue existing sales contracts (including sales to affiliates), so litigation would likely fail and harm the Trust.
- Trial court denied relators’ special exceptions and pleas; relators (XTO, Timberland, Bank of America) sought mandamus to dismiss Goebel’s derivative claims against XTO and Timberland and to challenge her claims against the trustee.
- The court considered whether a beneficiary may usurp a trustee’s discretionary litigation authority — requiring a showing of fraud, misconduct, or clear abuse of discretion to proceed — and whether Goebel pleaded facts sufficient to meet that standard.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a beneficiary may sue third parties on behalf of a trust when trustee refuses | Goebel: trustee wrongfully refused demand; she may sue derivatively to protect the Trust | Relators: trustee has broad discretionary authority under the indenture; beneficiary may only act if trustee’s refusal was fraudulent, misconduct, or clear abuse of discretion | Court: Trustee discretion prevails; beneficiary must plead wrongful refusal (fraud, misconduct, or clear abuse); Goebel failed to do so; derivative claims against XTO/Timberland dismissed |
| Interpretation of conveyances re: duty to renegotiate affiliate contracts | Goebel: conveyances do not bar a duty to renegotiate existing contracts; implied prudent-operator covenant applies | Relators: express language permits sales under existing contracts and gives XTO sole discretion to amend; no duty to renegotiate; implied covenant negated | Court: Conveyances unambiguous; XTO has discretion; no duty to renegotiate; trustee reasonably refused to sue |
| Whether alleged trustee conflict or reliance on outside counsel made refusal wrongful | Goebel: Bank’s potential personal liability and reliance justify discovery and challenge to trustee decision | Relators: trustee acted in good faith based on independent counsel; potential liability does not render decision wrongful | Court: Alleged conflict and counsel reliance insufficient; Goebel pleaded no particular facts showing fraud, misconduct, or clear abuse; no discovery warranted before dismissal |
| Whether beneficiary may bring derivative claims against the trustee | Goebel: frames claims as not derivative or otherwise permissible | Relators: beneficiary cannot usurp trustee; Texas Trust Code prescribes mechanisms for suits against trustees | Court: Goebel’s claims as pleaded are derivative and improperly attempt to represent the Trust; but this defect is curable — she may replead individual claims against trustee rather than suit on behalf of Trust |
Key Cases Cited
- Myrick v. Moody Nat’l Bank, 336 S.W.3d 795 (Tex. App.—Houston [1st Dist.] 2011) (terms of trust instrument can limit or expand trustee powers)
- In re Estate of Webb, 266 S.W.3d 544 (Tex. App.—Fort Worth 2008) (beneficiary may enforce trustee’s cause of action if trustee cannot or will not, but not simply because trustee declined)
- Interfirst Bank–Houston v. Quintana Petroleum Corp., 699 S.W.2d 864 (Tex. App.—Houston [1st Dist.] 1985) (discussing beneficiary’s rights to enforce trust claims against third parties)
- City of Houston v. Houston Police Officers Ass’n, 715 S.W.2d 145 (Tex. App.—Houston [14th Dist.] 1986) (courts should not substitute their judgment for a discretionary power except to prevent abuse)
- In re Schmitz, 285 S.W.3d 451 (Tex. 2009) (mandamus relief requires clear abuse of discretion and inadequate appellate remedy)