A corporation entered a trust agreement with a bank, in which the bank served as trustee. After the 2008 financial crisis, the original bank was acquired by Wells Fargo, which assumed the role of trustee. Section 5.5 of the trust agreement included the duty to “invest and manage trust assets as a prudent investor would.” See Tex. Prop. Code Ann. Section 117.004(a). The corporation retained “discretionary control” over the trust's assets until 2019 when a parent corporation acquired the original corporation. In the acquisition, the bank gained discretion over investment decisions as the trustee. The trust now contained a significant amount of the parent corporation’s shares, which needed to be sold to diversify the trust assets. The trustee and the parent corporation agreed over email on a “ratable liquidation plan” to liquidate the parent company shares. However, the trustee failed to liquidate all the shares of stock in a timely manner as agreed upon in the liquidation plan, and the value of the shares drastically dropped by roughly $30 million. The parent corporation then filed suit alleging that the email chain constituted a contract and that the bank had breached that contract. Later, it amended its complaint to include breach of fiduciary duty and breach of contract claims as to the trust agreement. The trustee argued that neither the email chain nor the trust agreement constituted a contract. The district court dismissed the breach of fiduciary duty claim. However, it held that the email chain and trust agreement were both contracts, and the trustee breached its duty by “failing to manage the Trust prudently” under Section 5.5 and granted summary judgment in favor of the parent company. The trustee subsequently appealed to the Fifth Circuit.
In Occidental Petro Co. v. Wells Fargo Bank, N.A., 117 F.4th 628 (5th Cir. 2024), the Fifth Circuit affirmed the district court’s summary judgment ruling in part. First, the Fifth Circuit found that the district court had erred in finding that the email chain was a contract. The email chain was not a contract because there had been no consideration – the parent corporation offered nothing in exchange for the trustee selling the shares in the manner it had requested. However, the Fifth Circuit held that the trustee was judicially estopped from asserting that the trust agreement was not a contract because the trustee had previously asserted a contrary position in the district court proceedings, stating that the duty owed by the trustee to an interested person was “the contractual duties set forth in the trust agreement.” Additionally, the district court relied on the parent company’s position in that proceeding in finding that no fiduciary duty existed. The Fifth Circuit then addressed whether there had been a breach of that contract. While the trustee argued there was nothing establishing what its duties were or how they were breached, the Fifth Circuit agreed with the district court that Section 5.5 outlined the duties owed by the trustee. The parties had agreed on a plan to diversify the trust assets without negatively impacting the parent company shares, but the trustee “failed to implement what it agreed to do to prudently manage the [t]rust.” Therefore, the Fifth Circuit found that the district court had properly granted summary judgment in favor of the parent corporation on the breach of contract claim. Second, the Fifth Circuit upheld the damages awarded by the trial court, finding that the trustee’s argument asserting that it would have reinvested the shares had “scant support” in the record; it also found that the trustee did not attempt to reinvest any proceeds from the stock it was able to sell. Third, the court affirmed the dismissal of the bank’s counterclaim that alleged a duty by the parent corporation’s agent to the trustee under Texas law. The court reasoned that the trustee failed to show that a duty was established under Texas law for the agent in the first place. Fourth, the court addressed the trustee’s argument that the district court erred in disregarding its affirmative defenses, namely that the parent corporation failed to mitigate losses. However, the court found that the parent corporation conclusively undermined the affirmative defenses because “(1) [the parent corporation] objected when the shares were not sold, (2) [the parent corporation] could not sell the shares itself; (3) [the trustee] concealed… the fact that it had not sold the shares for weeks, (4) [the trustee] did not seek [the trustee’s] help in selling the shares, and (5) [the trustee] could have transferred the shares” to another account in order to sell at any time after the parent corporation acquired the original corporation. Finally, the trustee’s last contention was that the court should have segregated the legal fees it owed as trustee and individually as the bank, but that argument failed. The court found that the trustee cited no caselaw that attorney’s fees “must be segregated when a single entity allegedly acted in different capacities.” Thus, the Fifth Circuit affirmed the district court’s damage calculations and the dismissal of the trustee’s counterclaim and affirmative defenses.
By Jace Brown [email protected]
Edited By Callighan Ard [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott: [email protected]