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Releases And Family Settlement Agreements In Trust And Estate Litigation



Releases And Family Settlement Agreements In Trust And Estate Litigation

A settlement agreement can be beneficial to all parties – it may help reduce litigation costs, facilitate dispute resolution, or guide the parties to a common understanding. However, settlement agreements do not come without risk. Settlement agreements should be entered into with care and with an understanding of the terms—and their implications. Austin Trust Co. v. Houren presents a good example of these considerations.  In Austin Trust, an agreement contained language in a release that barred the parties from bringing future claims.  The case serves as a cautionary tale to parties who wish to settle. 

Background

Following the death of their father, the beneficiaries of an estate realized that their distributions would be delayed until a federal estate tax return had been filed. Seeking to speed up the distribution process, the beneficiaries entered into a family settlement agreement (“FSA”) with all interested parties. The FSA was negotiated by the parties, who acknowledged that they were either represented by counsel, or consciously chose not to be represented by counsel.

The FSA contained a release that, among other things, released all claims for breach of fiduciary duty. The exact language in the agreement releases read as follows: “any and all liability arising from any and all Claims,” including “claims of any form of sole contributory, concurrent, gross, or other negligence, undue influence, duress, breach of fiduciary duty, or other misconduct” and defined “covered activities” to include “(1) the formation, operation, management, or administration of the Estate,…or the Trusts, (2) the distribution of any property or asset of or by…the Estate,…or the Trusts, (3) any actions taken (or not taken) in reliance upon this Agreement or the facts listed in Article I,” (4) “any Claims related to, based upon, or made evident in the Disclosures,” and (5) “any Claims related to, based upon, or made evident in the facts set forth in Article I.”

The FSA was signed on June 10, 2015. In early 2016, the executor of the estate filed the federal estate tax return, which did not list an alleged $37 million debt as either an asset or a liability. Austin Trust sent a demand letter seeking repayment of the alleged debt, which the executor rejected. Austin Trust claimed a breach of fiduciary duty, and the executor asserted that this duty had been released. The trial court agreed, and an appeal followed.

Analysis

Before the court addressed whether the executor had breached a fiduciary duty, it first had to determine whether the release agreement entered into by the parties was valid. In analyzing whether Austin Trust had released claims, the court discussed Texas’s public policy favoring freedom to contract. The parties freely entered into the agreement, with full opportunity to be represented by counsel, and to further their own interests. Their negotiations resulted in the FSA. The court demonstrated hesitancy to re-write the contract because one party no longer agreed with its terms. The court went on to list six factors that it considered in deciding whether the affirm the settlement agreement.

These factors are:

  • the terms of the contract were negotiated rather than boilerplate, and the disputed issue was specifically discussed;
  • the complaining party was represented by legal counsel;
  • the negotiations occurred as part of an arms-length transaction;
  • the parties were knowledgeable in business matters;
  • the release language was clear; and
  • the parties were working to achieve a once and for all settlement of all claims so they could permanently part ways.

The court noted that all these elements were satisfied, thus affirming the decision of the trial court. The footnote indicated that this decision was consistent with public policy in favor of upholding contracts that have been fairly negotiated. Because the court determined the release was valid, it did not have to reach the merits of whether a fiduciary duty was breached – those claims had been waived by the parties.

Conclusion

Settlements can help reduce litigation costs and facilitate dispute resolution – however, parties should exercise caution and diligence before executing a settlement agreement. The parties should ensure that they understand (and agree with) the scope and meaning of all relevant terms and anticipate potential disputes after the agreement is executed—they may (and likely do) prevent future claims if settlement remorse later sets in.

Have a question? Contact Jason Freeman, Freeman Law.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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