EXCULPATORY CLAUSES

Written and Presented by:

FRANK N. IKARD, JR.
Ikard & Golden, P.C.
400 West 15th St., Suite 975
Austin, TX 78701
(512) 472-2884

Written by:
LAUREN K. DAVIS
Ikard & Golden, P.C.
400 West 15th St., Suite 975
Austin, TX 78701
(512) 472-2884

State Bar of Texas

TRIAL OF A FIDUCIARY LITIGATION CASE
December 17-18, 2009
Fredericksburg

CHAPTER 10
 FRANK N. IKARD, JR.
IKARD & GOLDEN, P.C.
Attorney at Law
400 West 15th Street, Suite 975
Austin, Texas 78701
(512) 472-2884
(512) 472-3669 (fax)
www.ikardgolden.com

EDUCATION

• University of Texas, BA, 1965

• University of Texas School of Law, J.D., 1968

PROFESSIONAL ACTIVITIES

• Real Property Probate and Trust Law Section,

o Estate and Trust Litigation and Controversy Committee
• American College of Trust and Estate Counsel,
o Fellow 1979 – present
o Fiduciary Litigation Committee
o State Laws Committee
• Austin Monthly’s Best Lawyers in Austin, 2002
• Board Certified, Estate Planning and Probate Law, Texas Board of Legal Specialization 1977 -
present
• Martindale-Hubbell Bar Register of Preeminent Lawyers 2004
• Martindale-Hubbell “AV” rating
• Real Estate, Probate and Trust Law Section, State Bar of Texas
o Past Member of Section Council
o Past Chair of Section Council 1986
o Past member of Trust Code Committee
o Past Chair of Legislative Committee
• Texas Academy of Real Estate, Probate and Trust Lawyers
o Co-Founder
o Past Chair of Board of Directors
o Current member Board of Directors
• Texas Bar Foundation, Fellow 1991 – present
• Texas Super Lawyers (Texas Monthly Magazine) 2006, 2007
• The Best Lawyers in America, 1982-2006
• The Texas Lawyer Go-To Guide, Top Notch Lawyer 2002
• Who’s Who in American Law
• The Texas Lawyer Go-To Guide, Top To-Go Lawyer in the State of Texas, Trust & Estate Law
2007

COMMUNITY ACTIVITIES

• Admirals Club
• Chancellor’s Council, University of Texas
• Dean’s Round Table, University of Texas Law School – 2003
• Greater Austin Crime Commission
o Board of Directors, 1999 – present

 
SPEECHES AND PUBLICATIONS

Between the Deaths: Planning and Administrative Challenges, Advanced Estate Planning Course,
Santa Fe April 2008

Utilizing Disclosure Rules to Obtain Discovery in Trust Litigation, Tarrant County Probate
Litigation Seminar, Fort Worth, September 2008 Fort Worth
Role of Guardian Ad Litem in a Trust Case. Texas Bar CLE 13th Annual Advanced Estate Planning
Strategies Course, 2007
Trustee Duties and Fiduciary Litigation, Recent Developments In Trust Law. Dallas Bar
Association, May 2006.
Fiduciary Liability and Litigation: Are you a Target? Texas Bankers Association Advanced Trust
Forum, November 2005.
Recent Developments in Trust Litigation, Tri County Bar Association, January 2005.
Fiduciary Litigation, Dallas Estate Planning Council, September 2004.
Fiduciary Litigation, Executors & Trustees, Fiduciary Litigation Seminar, May 2004.
Negotiating Fee Contracts and Recovering Fees in Fiduciary Litigation, Advanced Estate Planning
Strategies, April 2004.
Trust Litigation in Texas, Second Annual Probate Litigation Seminar, October 2003.
Attorney Fee Contracts for Planning and Litigation, Advanced Estate Planning and Probate Course,
San Antonio, Texas, June 2003.
Negotiating Fee Contracts and Recovering Fees in Fiduciary Litigation, Travis County Bar
Association, January 2003.
The Nuts and Bolts of Fiduciary Responsibility and Risk Management, Texas Banker’s
Association Personal Trust Seminar, December 2002.
Negotiating Fee Contracts and Recovering Fees in Fiduciary Litigation, Dallas Bar Association,
November 2002.
Discretionary Distributions, 26th Annual Estate Planning & Probate Course, 2002.
Trust Litigation in Texas, Texas Society of CPA’s Estate Planning and Probate Seminar, August
2002.
Trust Litigation in Texas, Tarrant County Probate Assoc. Litigation Seminar, 2002.
Specialty Drafting Regarding the Fiduciary, Travis County Bar Association, Probate and Estate
Planning Seminar, March 2001.
Fiduciary Duties: What are They and How to Modify Them, Texas Banker’s Association Estate
Administration Seminar, October 2000.
What Property Are You Administering?/Conducting Inventory/Making Consistent Valuation of
Assets/Sections 177 and 706 Issues, Co-Author Alvin J. Golden, Wills, Estates, and Probate (A
Satellite Production), State Bar of Texas, January 2000.

 
Exculpatory Clauses Chapter 10

TABLE OF CONTENTS

I. METHODS USED TO ELIMINATE FIDUCIARY LIABILITY: ................................................................... 1

A) Modification or Elimination of Fiduciary Duties.................................................................................. 1
B) Explicit Purpose Clauses....................................................................................................................... 1
C) In Terrorem Clauses.............................................................................................................................. 1
D) Powers of Appointment ........................................................................................................................ 1
E) Releases and/or Indemnities.................................................................................................................. 2
F) Exculpatory Clauses.............................................................................................................................. 2

II. APPLICATION OF EXCULPATORY PROVISIONS..................................................................................... 2

A) Monetary Damages ............................................................................................................................... 2
B) Other Relief........................................................................................................................................... 3
C) Attorney’s Fees ..................................................................................................................................... 3
D) The General Power of Appointment Problem....................................................................................... 3

III. VALIDITY OF EXCULPATORY PROVISIONS............................................................................................ 3

A) Validity ................................................................................................................................................. 3
B) Strictly Construed ................................................................................................................................. 3
C) Public Policy Restrictions ..................................................................................................................... 3

IV. USE OF EXCULPATORY PROVISIONS ....................................................................................................... 4

A) Use With Care....................................................................................................................................... 4
B) Typical Usage ....................................................................................................................................... 4

V. EXCULPATORY PROVISIONS IN TRUSTS................................................................................................. 4

A) The Clause ............................................................................................................................................ 4
B) Applicability of the Clause ................................................................................................................... 5

VI. EXCULPATORY PROVISIONS IN WILLS ................................................................................................... 6

A) The Clause ............................................................................................................................................ 6
B) Applicability of the Clause ................................................................................................................... 6

VII. EXCULPATING CORPORATE DIRECTORS................................................................................................ 6

A) Director Fiduciary Duties...................................................................................................................... 6
B) Exculpating “Governing Persons” ........................................................................................................ 6
C) To Whom Does § 7.001 Apply? ........................................................................................................... 7
D) Limits on Exculpating Directors ........................................................................................................... 7
E) Application of § 7.001 .......................................................................................................................... 7
F) The Texas Duty of Care ........................................................................................................................ 7
G) Delaware and the Breach of the Duty of Care ...................................................................................... 8
H) The Clause ............................................................................................................................................ 9

VIII. EXCULPATION AND PARTNERSHIPS ........................................................................................................ 9

A) Partner Duties........................................................................................................................................ 9
B) Limitation or Exculpation of Partner Liability...................................................................................... 9
C) Duty of Loyalty................................................................................................................................... 10
D) Duty of Care........................................................................................................................................ 10

IX. EXCULPATION AND LIMITED LIABILITY COMPANIES...................................................................... 10

A) Duties .................................................................................................................................................. 10
B) Exculpation and Limitation of Liability.............................................................................................. 11
C) The Clause .......................................................................................................................................... 11

CONCLUSION............................................................................................................................................................. 11
i
Exculpatory Clauses Chapter 10

EXCULPATORY CLAUSES The use of discretionary purpose clauses may be

used to protect executors and trustees.
I. METHODS USED TO ELIMINATE
FIDUCIARY LIABILITY: C) In Terrorem Clauses
Over the years, numerous methods have evolved In Terrorem Clauses eliminate a beneficiary’s
to reduce or eliminate a fiduciary’s liability for breach status as a beneficiary and his or her standing to sue a
of fiduciary duty. While most of these methods apply fiduciary if he engages in a prohibited action, such as
only to executors or trustees, some of them may apply contesting a will or trust or suing a fiduciary.
to fiduciaries in business organizations. While the In Terrorem Clauses were originally drafted for
focus of this paper is on exculpatory clauses, it is the purpose of preventing contests of wills or trusts.
useful to give a general overview of some of the other They provide that if a beneficiary contests a will or
methods of reducing or eliminating a fiduciary’s trust, then he is disinherited. These clauses frequently
liability for breach of fiduciary duty. impose a condition precedent to taking under the will
or trust that the beneficiary not initiate or participate in
A) Modification or Elimination of Fiduciary a contest.
Duties In Terrorem Clauses are enforceable in Texas
If a fiduciary is not subject to a fiduciary duty, he [Calvary v. Calvary, 122 Tex. 204, 55 S.W.2d 527
cannot breach it. One method of reducing fiduciary (Tex. Comm. App. 1932, opinion adopted); Hammer v.
liability is to modify or eliminate one or more of the Powers, 819 S.W.2d 669 (Tex. App.—Fort Worth
fiduciary’s duties. The elimination of the duty 1991, no writ); Massie v Massie, 118 S.W. 219 (Tex.
eliminates the opportunity to breach the duty. An Civ. App. 1909, no writ)] but are strictly construed
exculpatory clause, on the other hand, only reduces or against enforceability. Estate of Newbill, 781 S.W.2d
eliminates the fiduciary’s liability for monetary 727 (Tex. App. – Amarillo 1989, no writ); Gunter v.
damages after he has breached his duty. Poague, 672 S.W.2d 840 (Tex. App. – Corpus Christi
Most statutory and common law fiduciary duties 1984, writ ref’d n.r.e.); Sheffield v. Scott, 662 S.W.2d
may be modified or revoked by the person creating the 674 (Tex. App. – Houston [14th Dist.] 1983, writ ref’d
fiduciary relationship. If the fiduciary is not subject to n.r.e.).
a fiduciary duty then he or she cannot be held to have In Terrorem Clauses are subject to recently
breached it. The fiduciary duties most often modified enacted “good faith” “probable cause” exceptions.
are those of prudence, loyalty, disclosure and/or Tex. Prob. Code § 64; Tex. Trust Code § 112.038. In
impartiality because breach of one or more of these other words, if the contest is brought in good faith with
duties is the most frequent ground for breach of probable cause for recovery, then the clause will not be
fiduciary duty. enforced.
There are statutory and public policy limitations In Terrorem Clauses have evolved to include
on the extent that some of these duties may be causes of action other than contests. They sometimes
modified or eliminated. These limitations are beyond provide that if the beneficiary of a will or trust sues or
the scope of this paper but should be considered by participates in a lawsuit against the fiduciary, contests
anyone attempting to modify or eliminate fiduciary an accounting by the fiduciary, or files or participates
duties. in a lawsuit to construe a will (without the consent of
Modification or elimination of fiduciary duties the fiduciary), then he is disinherited.
may be used to protect executors, trustees, partners, The author has serious question regarding whether
directors of corporations, and members or managers of or not such clauses are valid and enforceable in Texas.
LLCs. If they are, some of them might have the unintended
result of giving the fiduciary a general power of
B) Explicit Purpose Clauses appointment over the fiduciary estate being
If a fiduciary is given specific directions regarding administered.
how to exercise discretion, then he will be less likely to In Terrorem Clauses are primarily used to protect
abuse his discretion. While not eliminating either executors and trustees.
liability or damages, per se, this method assists the
fiduciary in complying with discretionary fiduciary D) Powers of Appointment
duties. Powers of appointment may be used, in the
When a fiduciary is given broad discretion or is a discretion of the fiduciary or another person, to
beneficiary of the fiduciary relationship, then eliminate a person’s status as a beneficiary and,
consideration should be given to specific directions to consequently, his standing to sue.
the fiduciary regarding the exercise of his discretionary A will or trust may give the fiduciary a power of
fiduciary duties. appointment over the fiduciary estate being
administered. This power of appointment may be
1
Exculpatory Clauses Chapter 10

general (i.e. the fiduciary can appoint to anyone) or F) Exculpatory Clauses

limited (i.e. the fiduciary can appoint only to a limited Exculpatory clauses are provisions in legal
class of beneficiaries). The effect of a power of instruments that purport to relieve a fiduciary from
appointment is that the fiduciary can change the financial liability for breaching one or more of his
beneficiaries. In theory, if a beneficiary were to sue the fiduciary duties.
fiduciary, the fiduciary could exercise the power and Exculpatory clauses may be used to protect
eliminate the plaintiff’s status as a beneficiary and his executors, trustees, directors of corporations, and
or her standing to sue. members or managers of LLCs. This paper deals with
Powers of appointment are primarily used to this method of limiting fiduciary liability.
protect executors and trustees.
II. APPLICATION OF EXCULPATORY
E) Releases and/or Indemnities PROVISIONS
Releases and indemnities are contracts between a A) Monetary Damages
beneficiary and a fiduciary wherein the beneficiary Exculpatory clauses purport to eliminate a
forgives the fiduciary for breaches of fiduciary duty fiduciary’s liability for monetary damages for
and/or agrees to reimburse the fiduciary or the breaching one or more of his or her fiduciary duties 1 .
fiduciary estate for damages caused by litigation.
Releases are used as a defense to breach of fiduciary
duty claims. Indemnities provide for the payment, by
persons or entities other than the fiduciary, of damages,                                                             
costs and sometimes attorney’s fees incurred in 1
Austin W. Scott and William F. Fratcher, The Law of
fiduciary litigation.
Trusts (Fourth Edition) § 222.1 provides that: A distinction
Fiduciaries sometimes ask beneficiaries to give is to be drawn between provisions in the trust instrument that
them releases for breach of fiduciary duty. Releases are permits the trustee to do acts that would not otherwise be
sometimes sought during the administration of the permissible and a provision that merely relieves the trustee
estate or trust (particularly when the beneficiary seeks from liability if he does them. Thus by the terms of the trust
to influence a discretionary decision by the fiduciary) the trustee may be authorized to invest in securities other
but more frequently upon the termination of the than those in which a prudent man would invest. In such a
administration of an estate or trust. case the powers of the trustee are enlarged by the provision.
It is the authors’ opinion that it is a breach of On the other hand, the trustee may not be authorized to make
fiduciary duty for a fiduciary to require a release as a such investments but it may be provided by the terms of the
condition precedent to receiving a distribution that the trust that he shall not be liable for making investments
unless he is guilty of an intentional breach of trust or of
beneficiary is otherwise entitled to, but for the release. gross negligence. The effect of a provision enlarging the
This practice by independent executors is specifically power of the trustee is to prevent acts from constituting a
prohibited by the Texas Probate Code. Tex. Prob. breach of trust that would otherwise be in breach of trust.
Code § 151(d). Some fiduciaries try to circumvent this The effect of a provision relieving the trustee of liability for
restriction by threatening to incur the expense and breach of trust, however, is not to extend his powers but to
delay of a judicial accounting and discharge if a release restrict his liabilities. Such a provision does not prevent an
is not voluntarily given by the beneficiary. act by the trustee from being a breach of trust if the act is not
In rare circumstances the fiduciary will seek an within his powers; but it does relieve him to a certain extent
indemnity as well as a release. This is much harder for from liability for the consequences of his act. The
a fiduciary to justify because he or she is not permitted distinction has been recognized in cases in which it has been
held that although a trustee who commits a breach of trust
to receive an indemnity in any court proceeding. may be relieved from liability, yet he cannot recover
As a general proposition, a fiduciary may not compensation with respect to the transaction that is in breach
receive a lawful release from a beneficiary for a breach of trust. Thus in Warren v. Pazolia trustee expended the
of fiduciary duty that is unknown and/or undisclosed. greater part of the trust estate in the erection of an office
Tex. Trust Code § 114.005. This is because the building. It was held that he thereby committed a breach of
fiduciary has a fiduciary duty to disclose information trust, and that he was not entitled to compensation with
to his or her beneficiary. Huie v. DeShazo, 922 S.W.2d respect to this transaction; but it was also held that he was
920 (Tex. 1996); Montgomery v. Kennedy, 669 S.W.2d not liable for the loss to the estate resulting from his act,
309 (Tex. 1984); Shannon v. Frost National Bank of since it was provided in the trust instrument that he should
San Antonio, 533 S.W.2d 389 (Tex. Civ. App. - San be liable only for “willful neglect or default.” So also in
Matter of Mallon it was held that where it was provided by
Antonio 1975, writ ref’d n.r.e.). the terms of the trust that a trustee should be liable only for
Releases and/or indemnities may be used to “his own willful default,” and he negligently permitted his
protect executors and trustees. co-trustee to misappropriate trust funds, he was not entitled
to commissions, but he was not liable for the breach of
trust."
2
Exculpatory Clauses Chapter 10

B) Other Relief III. VALIDITY OF EXCULPATORY

Generally, exculpatory clauses do not prevent a PROVISIONS
plaintiff from seeking non-monetary relief from a A) Validity
fiduciary. For example, exculpatory clauses should not Exculpatory clauses are valid in Texas. Neuhaus
prevent a plaintiff in a trust case from pursuing: v. Richards, 846 S.W.2d 70 (Tex. App. – Corpus
injunctive relief, receivership, removal, construction or Christi 1992, no writ); Interfirst Bank of Dallas, N.A. v.
instruction, an accounting, or denial or reduction of Risser, 739 S.W.2d 882 (Tex. App.—Texarkana 1987,
compensation 2 . While pursuing such causes of action, no writ); Corpus Christi National Bank v. Gerdes, 551
a plaintiff should be able to introduce evidence that the S.W.2d 521 (Tex. Civ. App. – Corpus Christi 1977,
fiduciary actually breached one or more of his writ ref’d n.r.e.).
fiduciary duties, even though an exculpatory clause
may protect the fiduciary from actual damages for the B) Strictly Construed
breach. Exculpatory clauses will, however, be strictly
construed against exculpation. Jewett v. Capital
C) Attorney’s Fees National Bank of Austin, 618 S.W.2d 109 (Tex. Civ.
An issue remains whether a plaintiff can recover App. – Waco 1981, writ ref’d n.r.e.).
attorney’s fees (if they are otherwise recoverable) for
bringing a non-monetary cause of action against a C) Public Policy Restrictions
fiduciary where there is an exculpatory clause. Prior to December 31, 2002, there was a common
law public policy restriction on exculpatory clauses
D) The General Power of Appointment Problem applying to trusts. This restriction was first enumerated
Care should be taken not to exculpate a fiduciary in the case of Langford v. Shamburger, 417 S.W.2d
from liability for appropriating all or any part of the 438, 444 (Tex. Civ. App. – Fort Worth 1967, writ ref’d
fiduciary property for his own use. To do so would n.r.e.), in which the court held that: “it would be
inadvertently make the fiduciary a beneficiary of the contrary to public policy of this state to permit the
fiduciary relationship. language of a trust instrument to authorize self dealing
If exculpatory provisions allow a fiduciary (who by a trustee.” Id; see also McLendon v. McLendon, 862
is not otherwise a direct beneficiary of the fiduciary S.W.2d 662, 676 (Tex. App—Dallas 1993, writ
relationship) to appropriate all or any part of the denied); Grider v. Boston Company Co., 773 S.W.2d
fiduciary property for the benefit of the fiduciary, the 338, 343 (Tex. App. – Dallas 1989, writ denied);
fiduciary's creditors, the fiduciary's estate or the InterFirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882
creditors of the fiduciary's estate, then the fiduciary (Tex. App. – Texarkana 1987, no writ).
will be deemed for tax purposes to hold a general This public policy was rejected by the Texas
power of appointment over the fiduciary property. supreme court in the case of Texas Commerce Bank,
I.R.C. § 2041(b)(1); Treas. Reg. § 20.2041-1(c)(1-2). N.A. v Grizzle, 96 S.W.3d 240, 249 (Tex. 2002). In
This may cause the fiduciary to be taxed on the income Grizzle the supreme court, relying on Texas Trust Code
from the fiduciary property and may cause the §111.002 3 and §113.051 4 and §113.059, 5 concluded
fiduciary property to be included in the fiduciary's that the Trust Code allows an exculpatory clause to
federal estate tax base. If exculpatory provisions allow relieve a corporate trustee from liability for self-
a fiduciary who is also a beneficiary to appropriate all dealing. Id. at 250-51.
or any part of the fiduciary property other than by an The court also held that:
"ascertainable" distribution standard, then the fiduciary
will be deemed to have a general power of appointment the State’s public policy is reflected in its
over the fiduciary property. I.R.C. § 2041(b)(1); Treas. statutes. And the Legislature has spoken on
Reg. § 20.2041-1(c)(1-2).
                                                            
3
TX Trust Code § 111.002 at that time provided: “if the
provisions of this subtitle and the terms of a trust conflict,
the terms of the trust control …”
4
                                                             TX Trust Code § 113.051 at that time provided: “In the
2 absence of any contrary terms in the trust instrument or
Bogert, Trusts & Trustees (Second Ed. Rev.) § 542
contrary provisions of this subtitle, in administering the trust
provides in part that: "Although an exculpatory clause may
the trustee shall perform all of the duties imposed on trustees
relieve the trustee from liability for damages, there may be
by common law.”
other remedies available to the beneficiary, for example,
5
removal of the trustee, enjoining the trustee from committing TX Trust Code § 113.059 at that time provided that a
an improper act, of denial or reduction of the trustee's settlor may relieve a corporate trustee from a “duty, liability,
compensation." or restriction imposed by this subtitle.”
3
Exculpatory Clauses Chapter 10

self-dealing and exculpatory clauses in the protect the fiduciary from liability. Even if the answer
Trust Code. The Legislature has expressly to this question is "yes," there remains a question
authorized the use of exculpatory clauses, regarding the degree of protection that the exculpator
stating that they can relieve a corporate would want the fiduciary to have.
trustee from liability except for certain Consideration of the use of any exculpatory clause
narrow types of self-dealing not at issue here. should begin with the question: "If the fiduciary
We therefore decline to hold that a trust breaches his trust and as a consequence thereof causes
instrument cannot exonerate a trustee from damages to the estate/trust, then who would the
liability for failing to promptly reinvest trust testator/settlor want to bear the loss?" Would the
monies based on public policy. … answer to this question be different if the fiduciary
committed intentional malfeasance rather than
Public policy, some courts have said, is a negligence?
term of vague and uncertain meaning, which A law firm that includes an exculpatory clause as
it pertains to the law-making power to define, boilerplate in its estate planning documents is courting
and courts are apt to encroach upon the disaster. This is especially true when the fiduciary is an
domain of that branch of the government if entity with whom the law firm has a pre-existing
they characterize a transaction as invalid relationship (such as a bank the law firm represents on
because it is contrary to public policy, unless a regular basis). Also, if the fiduciary is a corporation
the transaction contravenes some positive charging a full fee for its services as a fiduciary, then
statute or some well-established rule of law. exculpation of the fiduciary from liability is hard to
Id. at 250. justify. In fact, a traditional reason for appointing a
corporate fiduciary was the financial resources of a
The supreme court in Grizzle concluded this discussion corporate fiduciary to make good any loss they caused
by holding that: “We therefore conclude that public the estate of trust.
policy, as expressed by the Legislature in the Trust Factors pertaining to the use of exculpatory
Code, does not preclude a settlor from relieving a clauses may well be different with respect to
corporate trustee from liability for self-dealing, except corporations and LLCs than to estates and trusts. The
for what is specified in sections 113.052 and 113.053. paramount distinction is that managers and members
We disapprove Langford and its progeny 6 to the sign a company agreement with exculpatory provisions
extent they suggest otherwise.” (emphasis supplied) and shareholders who agree to bylaws with exculpatory
While the Texas Legislature subsequently provisions actually agree to the provisions while
amended the Texas Trust Code in response to Grizzle beneficiaries of trusts and distributees of estates have
so as to limit the extent a trustee can be exculpated, the no say whatsoever in whether or not their fiduciary is
holding in Grizzle is significant and should be kept in exculpated.
mind when drafting exculpatory clauses in general.
There are no provisions in the Texas Probate Code B) Typical Usage
that correspond to Texas Trust Code § 111.002, § As a general proposition, if a settlor or testator has
113.051 and § 113.059. Are there any public policy a close personal relationship with a designated
limitations on a testator’s ability to exculpate an fiduciary, and especially if the fiduciary is not
executor from liability and, if there are, how are these receiving compensation for his or her services as a
limitations affected by Grizzle? fiduciary, then some form of exculpation from liability
may be warranted. For example, if a settlor or testator
IV. USE OF EXCULPATORY PROVISIONS appoints his or her spouse as a trustee for their
A) Use With Care children, to serve without compensation, then the
Exculpatory provisions should be used with settlor may want to limit the trustee's potential liability.
extreme care and should never constitute boiler plate
provisions in wills and trusts. The threshold question to V. EXCULPATORY PROVISIONS IN TRUSTS
consider in evaluating the use of this type of clause is A) The Clause
whether the exculpator would want the objects of his "Notwithstanding anything to the contrary herein,
bounty to suffer material economic loss in order to my Trustee shall, to the greatest extent permitted by
Texas law at the time this clause is construed, be
                                                             exculpated from any liability whatsoever for any
6
See McLendon v. McLendon, 862 S.W.2d 662 (Tex.
alleged abuse of discretion, tort, breach of fiduciary
App.—Dallas 1993, writ denied); Grider v. Boston Co., 773 duty and/or breach of trust caused by any act or
S.W.2d 338 (Tex. App.—Dallas 1989, writ denied); omission in the administration of this trust. As a
InterFirst Bank of Dallas, NA. v. Risser, 739 S.W.2d 882 consequence, no person, firm or corporation ever
(Tex. App. - Texarkana 1987, no writ).  serving as my trustee shall ever be held personally
4
Exculpatory Clauses Chapter 10

liable to any other person, firm or corporation for any (1) relieving the trustee from a duty or
damages directly or indirectly arising out of any act or restriction imposed by this subtitle
omission committed in the administration of this trust. or by common law; or
This exculpation shall not, however, protect my trustee
from any liability for a breach of trust committed in (2) directing or permitting the trustee
bad faith, intentionally, or with reckless indifference to to do or not to do an action that
the interest of a beneficiary; or any profit derived by would otherwise violate a duty or
the trustee from a breach of trust. Even if this restriction imposed by this subtitle
exculpation clause shall not protect my trustee because or by common law.
of the foregoing sentence, in no event shall my trustee
ever be liable for any punitive or exemplary damages Tex. Trust Code § 114.007 (2006). This language was
for any act or omission committed in the taken from the Restatement of the Law of Trusts, 2nd
administration of this trust regardless of whether such §222.
act or omission constituted a breach of trust committed At the time that Texas Trust Code §114.007 was
in bad faith, intentionally, or with reckless indifference passed, the legislature also amended Texas Trust Code
to the interest of a beneficiary; or any profit derived by §111.0035 to provide that: "The terms of a trust
the trustee from a breach of trust." prevail over any provision of this subtitle, except that
the terms of a trust may not limit: … the applicability
B) Applicability of the Clause of Section 114.007 to an exculpation term of a trust."
In 2006 the Texas legislature amended the Texas Tex. Trust Code § 111.0035 (2006).
Trust code to overrule the Grizzle decision. It enacted The restrictions on exculpation contained in Texas
Texas Trust Code §114.007, which provided that: Trust Code §114.007 do not apply to transactions
occurring on or after January 1, 1984, regardless of the
§ 114.007 Exculpation of Trustee date of the creation of the trust. This is because of
Texas Trust Code §111.006, which provides that:
(a) A term of a trust relieving a trustee of
liability for breach of trust is § 111.006 Application
unenforceable to the extent that the term
relieves a trustee of liability for: This subtitle applies:

(1) a breach of trust committed: (1) to all trusts created on or after January 1,
1984, and all transactions relating to
(a) in bad faith; such trusts; and

(b) intentionally; or (2) to all transactions occurring on or after

January 1, 1984, relating to trusts
(c) with reckless indifference to created before January 1, 1984;
the interest of a beneficiary; provided that transactions entered into
or before January 1, 1984, and which were
subject to the Texas Trust Act, as
(2) any profit derived by the trustee amended (Articles 7425b-1 through
from a breach of trust. 7425b-48, Vernon's Texas Civil
Statutes), and the rights, duties, and
(b) A term in a trust instrument relieving the interests flowing from such transactions
trustee of liability for a breach of trust is remain valid on and after January 1,
ineffective to the extent that the term is 1984, and must be terminated,
inserted in the trust instrument as a consummated, or enforced as required
result of an abuse by the trustee of a or permitted by this subtitle. Tex. Trust
fiduciary duty to or confidential Code § 111.006 (2006).
relationship with the settlor.
Is there a possible loophole in the language of Texas
(c) This section applies only to a term of a Trust Code § 114.007? Is it possible to eliminate all of
trust that may otherwise relieve a trustee the fiduciary's fiduciary duties other than the ability to
from liability for a breach of trust. appropriate the fiduciary estate for the fiduciary, the
Except as provided in Section 111.0035, fiduciary's creditors, the fiduciary's estate or the
this section does not prohibit the settlor, creditors of the fiduciary's estate?
by the terms of the trust, from expressly:
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Exculpatory Clauses Chapter 10

VI. EXCULPATORY PROVISIONS IN WILLS prior to the Grizzle case7. These public policy
A) The Clause constraints would be those imposed by Langford (a
"Notwithstanding anything to the contrary herein, limitation on exculpation for self-dealing) and possibly
my Executor shall, to the greatest extent permitted by those imposed by § 222 of the Restatement of the Law
Texas law at the time this clause is construed, be of Trusts, 2nd8.
exculpated from any liability whatsoever for any
alleged abuse of discretion, tort, breach of fiduciary VII. EXCULPATING CORPORATE
duty and/or breach of trust caused by any act or DIRECTORS9
omission in the administration of my estate. As a Texas business organizations will be governed by
consequence, no person, firm or corporation ever the Texas Business Organizations Code (the “TBOC”)
serving as the personal representative of my estate after January 1, 2010, therefore, for simplicity, this
shall ever be held personally liable to any other person, paper will refer only to the relevant provisions in the
firm or corporation for any damages directly or TBOC.
indirectly arising out of any act or omission committed
in the administration of my estate. This exculpation A) Director Fiduciary Duties
shall not, however, protect the personal representative Under Texas law, corporate directors owe three
of my estate from any liability for directly taking or broad fiduciary duties: 1) obedience, 2) loyalty, and 3)
appropriating all or any portion of my estate for care. Gearhart Industries, Inc. v. Smith Intern, Inc.,
himself, his creditors, his estate or the creditors his 741 F.2d 707, 719-21 (5th Cir. 1984). The duty of
estate. Even if this exculpation clause shall not protect obedience requires a director to avoid committing ultra
the personal representative of my estate because of the vires acts, or acts beyond the scope of the authority of
foregoing sentence, in no event shall the personal the corporation as defined by its articles of
representative of my estate ever be liable for any incorporation or the laws of the state of incorporation.
punitive or exemplary damages for any act or omission Id. at 719. Issues related to the duty of obedience
committed in the administration of my estate." rarely arise because corporations generally have broad
purpose clauses in their articles of incorporation.
B) Applicability of the Clause The duty of loyalty requires a director to act in
There are no exculpatory provisions in the Texas good faith and he must not allow his personal interests
Probate Code that protect administrators from liability. to prevail over the interests of the corporation. Id.
Consequently, an analysis of the enforceability of Conduct implicating the duty of loyalty includes self-
exculpatory provisions relating to the personal dealing and usurpation of corporate opportunity.
representatives of estates applies only to executors who The duty of care requires a director to handle his
are exculpated under the terms of a will. duties with such care as an ordinarily prudent man
The fiduciary standards of executors of estates are would use under similar circumstances. Id. at 720.
the same as the fiduciary standards of a trustee. Texas This duty will be discussed more thoroughly below.
Trust Code § 37; Humane Society of Austin and Travis
County v. Austin Nat'l Bank, 531 S.W.2d 574, 577 B) Exculpating “Governing Persons”
(Tex. 1975), cert. denied, 425 U.S. 976, 96 S.Ct. 2177, The TBOC allows a Texas “organization” to limit
48 L.Ed.2d 800 (1976); McLendon v. McLendon, 862 a “governing person’s” liability for monetary damages
S.W.2d 662, 670 (Tex. App.—Dallas 1993, writ owed to the organization or its owners or members for
denied). an act or omission in certain instances. Section
Although executors of estates are subject to the 7.001(b) states:
same fiduciary standards as a trustee, the terms of the
Texas Trust Code do not apply to executors. Tex. Trust The certificate of formation or similar
Code §111.003. The fiduciary standards that apply to instrument of an organization to which this
executors are the common law fiduciary standards of a
                                                            
trustee.
7
There are two possible ways a court could impose i.e. the court could resurrect Langford and its progeny.
public policy constraints on an exculpatory clause in a 8
“An exculpatory clause is ineffective to relieve the
will. First the court could directly impose public policy fiduciary from acts committed in bad faith or intentionally or
constraints on the exculpation of an executor. Second, with reckless indifference to the interest of the beneficiary,
a court could rule that, because an executor is subject or of liability for any profit, which the fiduciary has derived
to the same fiduciary standards as a trustee, from a breach of trust.”
exculpation of an executor is subject to the same public 9
For an excellent and extensive review of director duties,
policy constraints that purportedly applied to trustees see Byron F. Egan, Director Duties in Troubled Times:
Process and Proof, Texas Bar CLE Webcast (January 27,
2009).  
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Exculpatory Clauses Chapter 10

section applies may provide that a governing not done so in bad faith, and he has not breached his
person of the organization is not liable, or is duty of loyalty.
liable only to the extent provided by the
certificate of formation or similar instrument, E) Application of § 7.001
to the organization or its owners or members Very little Texas caselaw has developed regarding
for monetary damages for an act or omission the corporate director duty of care or the standards of
by the person in the person’s capacity as a such duty of care. Even less Texas caselaw is available
governing person. TBOC 7.001(b). concerning the applicability of § 7.001 (or its
predecessors) and the exculpation of corporate
C) To Whom Does § 7.001 Apply? directors. However, there is an abundance of Delaware
TBOC § 7.001 applies to a domestic entity other caselaw on these subjects as they pertain to Delaware
than a general partnership, limited partnership, or LLC. law.
TBOC 7.001(a)(1). Thus, this section applies to This paper will first examine Texas’ treatment of
corporations. the duty of care, and then Delaware’s treatment of the
Additionally, the section only allows the duty of care and exculpatory clauses.
limitation of liability for a “governing person.” TBOC
§ 7.001(b). A “governing person” does include F) The Texas Duty of Care
directors of a corporation, however, the term does not In Texas, a Director’s duty of care is to handle his
include an officer who is acting in the capacity of an corporate duties with such care as “an ordinarily
officer. TBOC §§ 1.02(35)(A); 1.02(35)(B); 1.02(37). prudent man would use under similar circumstances.”
Gearhart Industries, Inc. v. Smith International, Inc.,
D) Limits on Exculpating Directors 741 F.2d 707, 720 (5th Cir. 1984), citing McCollum v.
There are restrictions on the ability to exculpate a Dollar, 213 S.W. 259 (Tex. Comm’n App. 1919,
corporate director. § 7.001(c) provides that elimination holding approved). In performing his duties, the
or limitation of liability of a governing person is not director must be diligent and informed and exercise
authorized to the extent the person is found liable for: honest and unbiased business judgment in pursuit of
corporate interests. Gearhart, 741 F.2d at 720.
(1) a breach of the person's duty of loyalty, if The business judgment rule is a defense to
any, to the organization or its owners or accusations of breach of the duty of care. Gearhart,
members; 741 F.2d at 721. Few Texas cases address the issues of
a director’s standard of care, negligent mismanagement
(2) an act or omission not in good faith that: or the business judgment rule. Id. However, in 1984,
the 5th Circuit announced in Gearhart that under the
(A) constitutes a breach of duty of the Texas version of the business judgment rule, courts
person to the organization; or will not interfere with the business judgment of, nor
impose liability upon non-interested corporate
(B) involves intentional misconduct or a directors, absent a showing of fraud or an ultra vires
knowing violation of law; act. Gearhart, at 721, 724 n 9.
If the standard announced in Gearhart is read
(3) a transaction from which the person received literally, then even grossly negligent conduct by a
an improper benefit, regardless of whether director would be protected by the business judgment
the benefit resulted from an action taken rule in Texas. This would be a significant departure
within the scope of the person's duties; or from the law in other jurisdictions, like Delaware,
where the business judgment rule does not protect
(4) an act or omission for which the liability of a grossly negligent conduct.
governing person is expressly provided by an Since Gearhart, a number of Federal district court
applicable statute. decisions in cases involving financial institutions have
held that the Texas business judgment rule does not
Because a corporation cannot exculpate a director for protect grossly negligent breaches of the duty of care.
the breach of the duty of loyalty, § 7.001 functionally FDIC v. Harrington, 844 F.Supp. 300, 306 (N.D. Tex.
only permits the exculpation of a breach of the duty of 1994); FDIC v. Schreiner, 892 F.Supp. 869 (W.D. Tex.
care. However, § 7.001(c)(2) provides that the 1995); FDIC v. Benson, 867 F.Supp. 351, 357-58 (S.D.
corporation cannot exculpate a director whose act or Tex. 1993); FDIC v. Brown, 812 F. Supp. 722, 726
omission was not in good faith. Therefore, an (S.D. Tex 1992. However, there is a question as to
exculpatory clause drafted under § 7.001 is effective whether the holding in those cases is restricted to
when a director has breached his duty of care, but has financial institutions.

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Exculpatory Clauses Chapter 10

One court held in a non-financial institution 2001); Smith v. Van Gorkom, 488 A.2d 858 (Del.
context that the business judgment rule does not bar 1985).
claims against a director for gross negligence. See Delaware has a very similar provision to Texas’ §
Weaver v. Kellogg, 216 B.R. 563, 584 (Bankr. S.D. 7.001. The Delaware Code Annotated (DGCL)
Tex 1997). However, another court criticized such authorizes the inclusion in a certificate of incorporation
holding and surmised that there were special public of:
policy reasons for the previous courts to impose
liability for gross negligence upon financial A provision eliminating or limiting the
institutions’ directors specifically. Floyd v. Hefner, personal liability of a director to the
No. H-03-5693, 2006 WL 2844245, at *28 (S.D. Tex. corporation or its stockholders for monetary
Sept. 29, 2006). The court in Floyd held that under damages for breach of fiduciary duty as a
Gearhart, in non-financial corporations, a director was director, provided that such provision shall
not liable for gross negligence under the business not eliminate or limit the liability or a
judgment rule. Id. director: (i) For a breach of the director’s
The Issue: If the Texas business judgment rule duty of loyalty to the corporation or its
protects a director’s grossly negligent breach of the stockholders; (ii) for acts or omissions not in
duty of care, then the Texas statute allowing good faith or which involve intentional
exculpation (TBOC § 7.001) is useless. misconduct or a knowing violation of law;
The problem is that if in Texas, non-financial (iii) under § 174 of this title [dealing with the
institution directors are protected by the business unlawful payment of dividends or unlawful
judgment rule for gross negligence, then the only time stock purchase or redemption]; or (iv) for any
they would need an exculpatory clause to protect them transaction from which the director derived
from paying monetary damages is if they commit an an improper personal benefit…8 DGCL §
ultra vires act or fraud. 102(b)(7).
A director is not liable for an ultra vires act unless
the act is illegal, and as to a director, an act is “illegal” One significant difference between Delaware and
when his act violates a specific statute, is malum in se Texas is that Delaware caselaw has clearly established
(inherently immoral, like murder), malum prohibitum the standard of liability for a Director’s duty of care.
(an act that is a crime merely because it violates a The Delaware business judgment rule is that the law
statute), or against public policy. Gearhart, 741 F.2d presumes that in making a business decision, the
at 719. directors of a corporation acted on an informed basis,
If a director commits an act that is ultra vires or in good faith, and in the honest belief that the action
fraudulent, then the director would not be protected by taken was in the best interests of the company. Disney,
the exculpatory clause because such act would violate 906 A.2d at 52. Directors’ decisions are respected by
§ 7.001(c)(2) (he would not have acted in good faith Delaware courts unless the directors are interested or
and his acts would have involved intentional lack independence relative to the decision, do not act in
misconduct or a knowing violation of law) or § good faith, act in a manner that cannot be attributed to
7.001(c)(4) (a governing person cannot be exculpated a rational business purpose, or reach their decision by a
for an act or omission for which the liability of a grossly negligent process that includes the failure to
governing person is expressly provided by an consider all material facts reasonably available. Id,
applicable statute). citing Emerald Partners v. Berlin, 787 A.2d 85, 91
Therefore, if the business judgment rule does in (Del. 2001).
fact protect directors from even grossly negligent Significantly, in Delaware, a Director may be held
conduct, then they have no need for an exculpatory personally liable for monetary damages for gross
clause because any conduct that would render them negligence. In re Walt Disney Co. Derivative
liable would fall within the statutory exceptions to Litigation, 906 A.2d 27 (Del. 2006); Smith v. Van
exculpation. Gorkom, 488 A.2d 858, 873 (Del. 1985). Delaware
defines gross negligence as including failure to inform
G) Delaware and the Breach of the Duty of Care one’s self of available material facts and conduct that
There is a significantly larger body of caselaw in constitutes reckless indifference or actions that are
Delaware than in Texas concerning a director’s duty of without the bounds of reason. McPadden v. Sidhu, 964
care, and particularly addressing the statutory right of a A.2d 1262, 1274 (Del. Ch. 2008). The Delaware
corporation to exculpate a director from monetary Supreme Court held that the mere fact that a director is
damages for breach of the duty of care. See In re Walt grossly negligent in breaching his duty of care does not
Disney Co. Derivative Litigation, 906 A.2d 27 (Del. automatically mean that he has acted in bad faith (a
2006); Emerald Partners v. Berlin, 787 A.2d 85 (Del. finding of bad faith would preclude a director from
obtaining the protection of an exculpatory clause under
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Exculpatory Clauses Chapter 10

DGCL § 102(b)(7)). Disney, 906 A.2d at 64-67. A) Partner Duties

Under Delaware law, the intentional dereliction of duty A partner owes to the partnership, the other
or the conscious disregard for one’s responsibilities partners, and a transferee of a deceased partner’s
constitute bad faith, which also results in the breach of partnership interest: (1) a duty of loyalty; and (2) a
the duty of loyalty. McPadden, 964 A.2d at 1274. duty of care. TBOC § 152.204(a). Additionally, a
Such conduct would therefore preclude a director from partner shall discharge the partner’s duties to the
benefitting from any exculpatory clause under partnership and the other partners, and exercise any
exceptions outlined in the Delaware exculpation rights and powers in the conduct or winding up of the
statute. partnership business (1) in good faith; and (2) in a
Thus, Delaware has established clear rules for manner the partner reasonably believes to be in the best
practitioners that guide them in drafting exculpatory interest of the partnership. TBOC § 152.204(b).
clauses for corporations, and the vast majority of Importantly, the TBOC expressly provides that a
Delaware corporations have such clauses. In re Walt partner does not violate a duty merely because his
Disney Co. Derivative Litig., 907 A.2d 693, 752 (Del. conduct furthers his own interest. TBOC § 152.204(c).
2005). The Delaware caselaw and exculpation statute Additionally, the Code states that a partner is not a
are in line with each other and as evidenced in the trustee and is not held to the standards of a trustee.
Disney case, they make logical sense when applied TBOC § 152.204(d).
together.
Although it is not clear under Texas law that non- B) Limitation or Exculpation of Partner Liability
financial industry directors are liable for grossly When a Trustee breaches a fiduciary duty, even if
negligent breaches of the fiduciary duty of care, it he is exculpated from liability and does not have to pay
would be prudent for the Texas practitioner to draft an monetary damages, the Trust Code still provides other
exculpatory clause as if that were the case so that a non-monetary remedies for the trustee’s actions. The
corporation’s directors are protected in the instance trustee can be removed, forced to provide an
that in the future Texas courts do decide to follow the accounting, or a host of other remedies.
precedent set by other jurisdictions and hold directors However, in the partnership context, monetary
liable for grossly negligent conduct. liability is the primary deterrent to keep a partner from
breaching his fiduciary duties. Thus, it would make
H) The Clause little sense for a person to agree to exculpate his
Because the Delaware exculpation statute is so prospective partner from monetary damages for
similar to that of Texas, it may be useful to use a breaches of fiduciary duty committed by that partner
Delaware corporation’s exculpatory clause as a guide. when he has little other recourse against such partner.
The following is an exculpatory clause that is similar to It makes more sense for the partners to define or carve
one used in a Delaware corporation: out in their partnership agreement what they agree
constitutes a breach of fiduciary duty. The Texas
To the fullest extent permitted by Texas Legislature has allowed for partners to do just that in
Business Organization Code or as it may their partnership agreement.
hereafter be amended, no director of the The partnership agreement governs the relations
Corporation shall be personally liable to the of the partners and between the partners and the
Corporation or its stockholders for monetary partnership, and the Code only fills the gaps to the
damages for breach of the fiduciary duty of extent the partnership agreement does not otherwise
care. provide. TBOC § 152.002. However, the Code
explicitly prohibits a partnership agreement and the
VIII. EXCULPATION AND PARTNERSHIPS partners from doing the following:
The liability of a governing person in a general
partnership may be limited or restricted to the extent 1) Eliminating the duty of loyalty.
permitted under Chapter 152. TBOC § 7.001(d). The However, the partners by agreement
liability of a governing person in a limited partnership may identify specific types of activities
may be limited or restricted to the extent permitted or categories of activities that do not
under Chapters 153 and 152 (where applicable to violate the duty of loyalty if the types or
limited partnerships). Id. categories are not “manifestly
Limited partnerships are governed by Chapter unreasonable.”
153 of the TBOC. However, in cases not provided for
by Chapter 153, the provisions of Chapter 152 2) Eliminate the duty of care. However,
governing general partnerships apply. the partners by agreement may
determine the standards by which the
performance of the obligation is to be
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Exculpatory Clauses Chapter 10

measured if the standards are not While the TBOC defines the duty of care for a
“manifestly unreasonable.” partner in § 152.206, it fails to define the applicable
standard of care. Is a partner liable for gross
3) Eliminate the obligations of good faith negligence, or only for fraud, as may be the case in the
under § 152.204(b), except that the context of corporate directors?
partners by agreement may determine There is very little case law on the issue of
the standards by which the performance standard of care for the duty of care in the partnership
of the obligation is to be measured if the context, and most of the case law is several decades
standards are not “manifestly old. Thus, the old case law applied to former versions
unreasonable.” TBOC § 152.002. of the partnership statutes. The case law that is on
point holds that mere negligence in the management of
Thus, while the TBOC does not allow either a general the affairs of a general partnership does not give rise to
partnership or a limited partnership to exculpate the a cause of action. Ferguson v. Williams, 670 S.W.2d
partners for breaches of the duty of loyalty or of care, 327, 331 (Tex. App.—Austin 1984, writ ref’d n.r.e.).
or to eliminate the obligation of good faith, the TBOC Thus, it appears that in order to be liable for a breach
does allow the partners to better define in their of the duty of care, a person must be at least grossly
partnership agreement what those duties entail, as long negligent.
as the provisions are not “manifestly unreasonable.” Given the uncertainty of the case law, § 115.002
has provided an opportunity for the partners to define
C) Duty of Loyalty the standard for themselves. Whether such standard is
Notice that the statute allows the partners to “manifestly unreasonable” will be up to a court to
identify activities “that do not violate the duty of decide. To uphold the provision, it is important that
loyalty.” This is not permitting a partnership both parties to the partnership agreement are aware of
agreement to limit or eliminate liability of a partner the provision, so the provision should be made
who breaches the duty of loyalty related to certain conspicuous and explicit.
activities. Rather, it is allowing the partnership Since there is so little caselaw in the partnership
agreement to declare some activity is not a breach of area of the law on the standard for the duty of care,
the duty of loyalty. The difference is significant. In practitioners should look to other areas of the law for
declaring that some activity is not a breach of the duty guidance. It seems reasonable that a partnership
of loyalty, when a partner acts in such defined manner, agreement could exculpate partners for acts committed
it is an absolute defense that such activity did not give in gross negligence (as apparently allowed for
rise to the duty of loyalty. However, an exculpatory corporate directors), but not committed fraudulently, in
clause is in the nature of an affirmative defense. bad faith, intentionally, or with reckless indifference to
Emerald Partners v. Berlin, 787 A.2d 85, 91 (Del. the interest of the partnership.
2001); Gesoff v. IIC Industries, inc., 902 A.2d 1130,
1164 (Del. Ch. 2006). If the partnership agreement IX. EXCULPATION AND LIMITED LIABILITY
were allowed to exculpate or limit the partner’s COMPANIES
liability for taking such action, then a trial could ensue A) Duties
and a jury could determine such partner was guilty of The Code does not define or expressly impose
such breach of the duty of loyalty, but the exculpatory fiduciary duties on managers or members of an LLC.
clause would ultimately protect the partner from However, by referring to fiduciary duties in § 101.401,
liability for monetary damages. it implicitly recognizes that such duties exist. Thus, it
If used thoughtfully, § 152.002 can be of more has generally been assumed that managers in a
assistance to the partners than would a typical manager managed LLC and members in a member-
exculpatory clause. managed LLC owe fiduciary duties similar to those of
corporate directors.
D) Duty of Care The Delaware Limited Liability Company Act,
A partner’s duty of care is to act in the conduct from which the Texas version was inspired, expressly
and winding up of the partnership business with the emphasizes the policy of giving maximum effect to
care of an ordinarily prudent person would exercise in principles of freedom of contract and enforceability of
similar circumstances. TBOC § 152.206. An error in LLC agreements. Delaware LLC Act § 18-1101(b).
judgment does not by itself constitute a breach of the Although the Texas version of the LLC Act does not
duty of care, and a partner is presumed to satisfy the expressly state this policy, the legislative history of the
duty of care if the partner acts on an informed basis, in LLC Act indicates that this was the intent of the Texas
good faith, and in a manner the partner reasonably Legislature, as well. This intent to recognize or
believes to be in the best interest of the partnership. Id. emphasize the principles of freedom of contract
appears to be unique to LLC’s.
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Exculpatory Clauses Chapter 10

B) Exculpation and Limitation of Liability attempts to exculpate fraud or breaches of duty

According to § 7.001(d), the liability of a committed in bad faith, the prudent practice would be
governing person in a limited liability company may be to follow the guidelines set in other areas of the law
limited or restricted to the extent permitted under § and exculpate governing persons in the LLC for gross
101.401. negligence, but not for bad faith, fraud, or acts
TBOC § 101.401 provides that a LLC company committed intentionally or with reckless indifference
agreement may expand or restrict any duties, including to the interest of the LLC.
fiduciary duties, and related liabilities that a member,
manager, officer, or other person has to the company or C) The Clause
to a member or manager of the company. TBOC § Exculpation of Members. In carrying out their
101.401. duties hereunder, the Members shall not be liable to the
This provision essentially leaves it to the courts to Company or to any other Member for their good faith
determine to what extent and which duties and actions, or failure to act, or for any errors of judgment,
liabilities may be eliminated or limited as a matter of or for any act or omission believed in good faith to be
public policy. within the scope of authority conferred by this
There are two possibilities as to how courts will Agreement, but only for their own willful misconduct
interpret this statute. The first is that courts may in the performance of their obligations under this
simply look to the restrictions placed on exculpatory Agreement. Actions or omissions taken in reliance
clauses by caselaw and statutes for other forms of upon the advice of legal counsel as being within the
business entities. scope of authority conferred by this Agreement shall
The second possibility is that courts may follow be conclusive evidence of such good faith; however,
the reasoning of the Texas supreme court in Texas good faith may be determined without obtaining such
Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240 (Tex. advice. McConnell v. Hunt Sports Enterprises
2002), where the court essentially held that unless the (1999),132 Ohio App.3d 657, 692, 725 N.E.2d 1193,
Texas Legislature explicitly limits what can be 1217.
exculpated, there are no limits on exculpatory clauses.
Id. at 249-250 (holding that the State’s public policy is CONCLUSION
reflected in its statutes, and that because the Trust As demonstrated above, there are many options
Code did not expressly limit exculpatory clauses by available to protect fiduciaries, no matter what capacity
prohibiting exculpating a trustee for self-dealing, then in which they serve. The exculpatory clause is one of
a trustee could be exculpated for self-dealing). the more powerful tools at a drafter’s disposal.
While there is a persuasive argument that courts However, the courts and the Legislature have restricted
will follow the Grizzle reasoning, practitioners must the ability to exculpate fiduciaries to some degree,
also remember that the Texas Legislature reacted to the depending upon the type of fiduciary. While the law is
Grizzle ruling by revising the Trust Code and expressly different for each type of fiduciary, generally, public
putting statutory limits on exculpatory clauses. See policy tends to prohibit the exculpation of fiduciaries
above discussion of Grizzle and Tex. Trust Code § for acts committed in bad faith or fraudulently.
114.007 (2006). However, there is a difference Finally, it is important that practitioners do not
between Trust law and LLC law. In Trust law, there draft boilerplate exculpatory clauses without an eye
was already a long established precedent of caselaw toward their particular client’s and the beneficiary’s
holding that there were limits to exculpatory clauses circumstances. In many circumstances, an exculpatory
for trustees. See Langford v. Shamburger, 417 S.W.2d clause will not be appropriate, and may result in
438 (Tex. Civ. App.—Fort Worth 1967, writ ref’d unintended consequences if improvidently used.
n.r.e.); McLendon v. McLendon, 862 S.W.2d 662, 676
(Tex. App.—Dallas 1993, writ denied); Grider v.
Boston Co., 773 S.W.2d 338, 343 (Tex. App.—Dallas
1989, writ denied); InterFirst Bank of Dallas, N.A. v.
Risser, 739 S.W.2d 882, 899 (Tex. App.—Texarkana
1987, no writ). The Grizzle case turned those cases on
their heads. In the LLC arena, there is no such caselaw
precedent.
However, it could be argued that the same public
policy reasons for establishing some limits on
exculpatory clauses, such as prohibiting the
exculpation of liability for fraud, are necessary.
Therefore, to avoid the controversy that might
arise if an exculpatory clause tests the limits and
11