Griff's Notes, March 31, 2022: Can One Misplaced Word Torpedo a No-Contest Clause?
Tax, trusts and estates updates from around the country
I have written a lot lately about no-contest clauses. This is not by affinity, but instead reflects the substantive issues in a lot of trusts and estates disputes I research. That being said, I am starting to get typecast as the “no-contest clause” guy, and this is a label I have decided to embrace.
My personal feelings aside, I wrote on March 29 about how simple word usage - “may” versus “shall” - can completely change the effect of a spendthrift clause within a trust. Today, the theme stays the same, but in a different context - a no-contest clause.
The no-contest clause is rife with boilerplate language, and is rarely customized. This reliance on boilerplate can cause issues. However, getting too cute with drafting can also cause issues. It is a double-edged sword, that can leave you feeling like there is no way to win. When the goal is to discourage litigation, and the no-contest clause still creates litigation, is that a bad outcome?
This was the theme of today’s case - In re The Phyllis McDill Revocable Trust - out of the Wyoming Supreme Court, published March 22, 2022.
This was a case that was frustrating to read, as the deceased settlor of the revocable trust (or her attorney) went out of their way to create a thoughtful, softer, well-drafted no-contest clause. While it had the intended outcome, it still resulted in litigation in multiple states.
Facts
Phyllis had three children - Michael, Thomas, and Teresa. The former two children are the subjects of this litigation.
Phyllis’s revocable trust provided $100,000 gifts to each of her three children, with the balance being divided equally among her grandchildren. However, there were four subsequent amendments enacted:
First Amendment: Added Michael as a co-trustee.
Second Amendment: Added Thomas as an additional co-trustee, added an accounting requirement, and gave Thomas the settlor’s residence.
Third Amendment: Revoked third amendment (removing Thomas as co-trustee and removing gift of residence to Thomas) and ratified and confirmed original trust and first amendment.
Fourth Amendment: Restated original trust and first amendment, while adding a no-contest clause.
The no-contest clause was unique, in that it left the definition of a “contest” or “attack” on the trust up to the discretion of the trustee (in this case, Michael). Anytime you have sibling versus sibling, this sets up to be a bad outcome, but let’s continue.
Possibly to discourage some of these sibling disputes, the no-contest clause had an amnesty procedure. If the trustee determined that a beneficiary had initiated a petition, contest or other claim which could otherwise lead to forfeiture of the beneficiary’s interest, the trustee could provide written warning of the intent to enforce the no-contest clause. The beneficiary, after receiving written warning, would have 30 days to withdraw their petition, contest, or claim, which would allow the beneficiary to save their trust interest and avoid forfeiture.
The no-contest clause also listed out acts that would rise to the level of a contest. These included, for example, a direct or indirect contest where a beneficiary “unsuccessfully” contests the trust. If you read this and pegged it as the problem word, you are correct, as I also had a similar initial gut reaction when reading this case. There was additional qualifying language, however, as the example went on to state “or, in any manner, attacks or seeks to impair or invalidate” the trust. This qualifier would seem to cancel the question of whether a contest was unsuccessful, but as we will see the Court didn’t need to analyze the qualifier.
What kicked off the battle was Thomas’s receipt of a statutory notice of the trust and its terms, followed by instructions that any beneficiary wishing to contest the trust had 120 days to do so under Wyoming law. So, Thomas took it upon himself to do so. He filed a petition in Texas (where he lived) against Michael (as trustee) and his attorneys alleging, among other things, that the third and fourth amendments to the trust were the products of undue influence. What was at issue? The decedent’s personal residence, that had gone to Thomas under the second amendment but was taken away under the third and fourth amendments.
There was an extensive procedural history in both Texas and Wyoming which takes away from the facts, so I will not cover it in detail, but ultimately the Texas case was dismissed for lack of personal jurisdiction and Texas’s attorney-immunity doctrine. While the Texas case was still pending, Michael (as trustee) sent notice to Thomas warning him of the intent to enforce the no-contest clause unless Thomas withdrew his case, which he did not.
The Wyoming battle, which found its way to the Wyoming Supreme Court (mainly through Thomas’s repeated attempts to amend his answers/petitions or extend the deadlines for filing them), was kicked off by Michael’s petition for instructions regarding forfeiture of Thomas’s trust interest after the Texas case had been dismissed.
What we ended up with is a chicken-or-the-egg scenario. When a no-contest clause is in dispute, does the beneficiary whose interest could be forfeited have standing nonetheless to bring an action after their interest has been forfeited? Does this change if the events leading to forfeiture are in dispute as well?
Analysis
Thomas wanted his day in court, to have his claims heard as to the question of whether the third and fourth amendments (the latter of which added the no-contest clause) were products of undue influence, as well as the question of whether his brother had breached his duties as trustee. What was at stake? A $100,000 bequest, along with the decedent’s residence of unknown value (the latter of which required success on the undue influence claim).
Thomas’s procedural missteps led to a loss of standing, the running of the statute of limitations in Wyoming, a dismissal of the Texas case, and the loss of the ability to raise counterclaims and affirmative defenses (since many claims were not raised by Thomas until the appeal, which means they are dismissed). Nonetheless, the Court considered some of the merits and claims in Thomas’s appeal.
The central issue was whether summary judgment was appropriate on the enforcement of the no-contest clause. Thomas argued that the trial court should not have simply accepted Michael’s alleged facts at face value, and instead should have accepted Thomas’s blanket denial of facts as precluding summary judgment. But, this is not how summary judgment works - Michael’s motion for summary judgement shifted the burden to Thomas to demonstrate sufficient facts to establish a genuine dispute of material facts.
The Court acknowledged Thomas’s failure to allege any specific facts to the contrary, while also stating that the facts in Michael’s petition were sufficient prima facie evidence of a violation of the no-contest clause. Thomas legally contested the case in Texas, received notice of the violation of the no-contest clause, and failed to withdraw his case under the amnesty provision, and it is hard (if not impossible) to disprove these facts. Thomas tried to argue that he had not received notice of Michael’s intent to enforce the no-contest clause, calling into question the authenticity of the certified mail receipt, but since this issue was not raised at the trial court level the Wyoming Supreme Court refused to address it.
Thomas then tried to argue that the no-contest clause required him first to be “unsuccessful” (here comes that problem word) in his contest. Central to Thomas’s argument is that neither the Texas court nor the Wyoming courts ever ruled on the merits of his undue influence claim and breach of fiduciary duty claims, but instead dismissed his claims on procedural and jurisdictional grounds. Thus, since his claims were never given the effect of res judicata, his contest could not rise to the level of being unsuccessful. However, the Court looked only to the Webster’s Dictionary’s plain meaning of unsuccessful - not producing a favorable or desired outcome - and concluded that requiring success on the merits was superfluous under this plain definition.
Therefore, the Court affirmed that the no-contest clause was enforceable and summary judgment in favor of Michael was appropriate.
This domino toppled Thomas’s argument of standing to enforce breach of fiduciary claims, since the enforcement of the no-contest clause caused him to lose standing as either a beneficiary or qualified beneficiary under the terms of the trust and the Wyoming Uniform Trust Code.
Takeaways
I am reminded of Sir Patrick’s Stewart’s quote as Captain Jean-Luc Picard on Star Trek - “It is possible to commit no mistakes and still lose.”
The no-contest clause at issue was cleanly and thoughtfully executed, with the only possible mistake (if one could call it that) being the inclusion of the word “unsuccessful.” This may not be a mistake, however. While Wyoming gives full force and effect to no-contest clauses, other states impose conditions on their enforcement (such as a lack of reasonable cause for a contest). Perhaps the drafter, or the boilerplate language, considered this possibility when including this word. And, the word was simply an afterthought in what really seemed to be a proxy battle between two siblings.
One must consider whether this was a loss, as well. Sure, the no-contest clause worked as intended, but at what cost? If the intent of the settlor/decedent was to keep the battle out of court, this case can be considered a loss, especially given the cost of litigation to the trust and corresponding reduction of beneficiaries’ interests. Of course, one can never completely avoid lawsuits, even frivolous ones.
Nonetheless, cases like this continue to highlight that no-contest clauses should be well thought-out, with almost a chess-like approach to identifying litigious beneficiaries and anticipating the arguments they may make (pro se or through their attorneys). Perhaps, in this case, the drafter could have anticipated the undue influence argument and included such a claim in the list of “contests” or “attacks” on the trust. Such a claim is fairly objective.
Alternatively, a drafter could go deeper to protect the trustee, by including “harassment” or “threats” against the trustee by a beneficiary. This is harder to prove, but can also give trustees legal standing to enforce a boundary against abuse. Of course, this must also be balanced with the trustee’s duty to inform, and may not protect a beneficiary who is DARVO-ed by an abusive trustee. After all, it is easy at the drafting phase to also become too myopic and one-sided to fully protect all parties and create a good result. When a golden child dynamic exists, perhaps there is undue influence both ways.
Finally, one must consider whether they can give a beneficiary enough to discourage a contest. In this case, $100,000 was the ticket to entry. Would a higher amount have discouraged the dispute? We shouldn’t guess. But, as any seasoned practitioner can tell you, some beneficiaries have an axe to grind and no amount of money can discourage them. In this type of case, it may be a good idea to avoid appointing a sibling as trustee to begin with.