Hunter v. Hunter, Trustee, 838 S.E.2d 721 (Va. 2020): A valuable contribution to in terrorem/no-contest jurisprudence in the context of trusts

1 Title Hunter v. Hunter, Trustee, 838 S.E.2d 721 (Va. 2020): A valuable contribution to in terrorem/no-contest jurisprudence in the context of trusts Text Justice D. Arthur Kelsey’s opinion in the 2020 Virginia case of Hunter v. Hunter, as Trustee of the Third Amended and Restated Theresa E. Hunter Revocable Living Trust, is a tour de force, on a par with decisions authored by the likes of Justice Horace Gray (1828-1902) and other such scholar-jurists of years long gone by. Gray’s Jackson v. Philips, 96 Mass. 539 (1867), particularly comes to mind. Thorough, clear, concise, jurisprudentially contextual, jargon-free, and rock solid when it comes to applying the common law as enhanced by equity, Kelsey’s opinion masterfully and efficiently--efficiency of language was not Gray’s strong point--lays out the past, present, and likely future state of the law when it comes to the enforceability of in terrorem/no-contest clauses in trust instruments. Such clauses are covered generally in §5.5 of Loring and Rounds: A Trustee’s Handbook [pages 438-445 of the 2020 Edition]. The relevant portions of the section are reproduced in the appendix below. Appendix §5.5 Involuntary or Voluntary Loss of the Beneficiary’s Rights [from Loring and Rounds: A Trustee’s Handbook (2020), with enhancements] *** No-contest or in terrorem provisions. Introduction. In the context of outright testamentary dispositions under wills, the anti-contest provision was traditionally the domain of equitable-election jurisprudence, a topic that is taken up generally in §8.15.82 of this handbook.1 In the trust context, however, the fact that a trust does not necessarily terminate as of the death of the settlor, coupled with the fiduciary principle, complicates matters: How to separate the true contest from the good faith effort to seek a judicial clarification of some ongoing equitable right, duty, or obligation, as well as from the good faith effort to seek to have some breach of trust remedied.2 A “no-contest” or “in terrorem” or “anti-contest” clause in a trust instrument provides for the forfeiture or reduction of the interest of a beneficiary who “contests” the arrangement.94 In the face of such a clause, even a minor beneficiary’s equitable interest could be at risk were a contest to be initiated on his or her behalf.95 The hope is that the beneficiaries (or their surrogates) will be deterred from engaging in costly litigation against the trustee, and one another, and in generally subjecting the settlor's personal affairs to unwanted publicity. “Such clauses promote the public policies of honoring the intent of the donor and discouraging litigation by persons whose expectations are frustrated by the donative scheme of the 1 See Smithsonian Institution v. Meech, 169 U.S. 298 (1898). 2 See generally Hunter v. Hunter, Trustee, 838 S.E2d 721 (2020). 94See generally Annot., Validity and enforceability of provisions of will or trust instrument for forfeiture or reduction of share of contesting beneficiary, 23 A.L.R.4th 369 (1983). 95See, e.g., EGW v. First Fed. Sav. Bank, 2018 WY 25, 413 P.3d 106 (Wyo. 2018). 2 instrument.”96 Some courts have enforced such clauses.97 (One court would even go so far as to enforce a provision forfeiting the equitable interest of a trust beneficiary who urges or voluntarily aids someone else to contest.)98 Other courts, however, citing public policy considerations, do not enforce in terrorem/no-contest clauses.99 In recognition of the fact that “the validity of no-contest clauses is not universally accepted, nor is (where these clauses are valid) the probable-cause exception,” such clauses are generally construed narrowly.100 In one case, the court held that a trust beneficiary’s sending of litigation-threatening letters to the lawyer who had drafted the trust instrument and to another beneficiary was not the kind of contesting that the instrument’s no-contest clause had been designed to deter.101 In another case, the filing by a trust’s beneficiaries of a regulatory misconduct complaint against trust counsel was held not to trigger the instrument’s no-contest clause, this even though the complaint contained passages that were critical of the trustees.3 Mesopotamia. Since time immemorial testators have been inserting in terrorem provisions into their wills. “A Mesopotamian will from the thirteenth century B.C. declared that the disgruntled beneficiary must ‘set his cloak upon the doorbolt’ and then ‘depart into the street’ as his more respectful brother acquired the entire inheritance.”4 In those days loss of the protection of the family was indeed a terrifying prospect. England. In England, a no-contest clause is probably enforceable, provided it is coupled with an express gift over.102 Overreaching is always a concern. The in terrorem clause contained in the 1046 will of the widow Wolgith for the benefit of King Edward the Confessor and others, for example, is the type of clause that one who is concerned about enforceability should probably avoid: “[A]nd, he who would ignore my will, which I have executed with the witness of God, may he be denied this earth's joy and may the Almighty Lord who created and shaped all beings shut him out of the gathering of all the holy ones on Doomsday; and, may he be taken to Satan, the devil, and to all his be damned companions, to the pit of Hell, and there 96Donkin v. Donkin, 314 P.3d 780, 787 (Cal. 2013) (“In tension with these public policy interests are the policy interests of avoiding forfeitures and promoting full access of the courts to all relevant information concerning the validity and effect of a will, trust, or other instrument.”). 97See generally Annot., Validity and enforceability of provisions of will or trust instrument for forfeiture or reduction of share of contesting beneficiary, 23 A.L.R.4th 369 (1983). See also Restatement (Third) of Property (Wills and Other Donative Transfers) §8.5 (providing that a provision in a donative document purporting to rescind a donative transfer to, or a fiduciary appointment of, any person who institutes a proceeding challenging the validity of all or part of the document is enforceable unless probable cause existed for instituting the proceeding). 98See Estate of Stewart, 230 Ariz. 480, 286 P.3d 1089, 1094 (Ct. App. 2012) (The court, however, would not enforce a provision forfeiting the interests of a trust beneficiary who is subpoenaed to testify in a court proceeding or to provide documentary evidence or when sworn to provide truthful testimony in court.). 99See generally Annot., Validity and enforceability of provisions of will or trust instrument for forfeiture or reduction of share of contesting beneficiary, 23 A.L.R.4th 369 (1983). 100Restatement (Third) of Trusts §96 cmt. e. Equity’s disfavor of forfeitures, a topic that is taken up in §8.12 of this handbook, has been said to underpin the principle that in terrorem (no-contest) clauses are to be narrowly construed. See, e.g., Ruby v. Ruby, 2012 Il App (1st) 103210, 973 N.E.2d 361 (Ill. App. Ct. 2012). 101See Rafalko v. Georgiadis, 777 S.E.2d 870 (Va. 2015). 3 See Heslin v. Lenahan, 836 S.E.2d 793 (S.C. Ct. App. 2019). The complaint in question had been filed with the South Carolina Office of Disciplinary Counsel. 4 See Hunter v. Hunter, Trustee, 838 S.E.2d 721 (Va. 2020). 102Lewin ¶5-10 (England). 3 suffer, with the enemies of God, without ceasing, and never bother my heirs.”103 Three categories of contest. In the case of the trust, there are really three categories of “contest.” One can contest the circumstances surrounding a trust's creation,104 its purposes, or how it is being administered, or any combination thereof. Assuming that the settlor intended to impress a trust upon the property, not to make a gift to the “trustee,” then it would seem inconsistent with the concept of the trust for a court to apply a “no contest” clause to the third category, e.g., good-faith actions brought by beneficiaries to construe the terms of governing instruments or to remedy breaches of trust.105 As to the latter, the breach of the duty of loyalty particularly comes to mind.106 Accountability, after all, is the glue that holds the institution of the trust together.107 Under the UTC, a “contest” is “an action to invalidate all or part of the terms of the trust or of property transfers to the trustee.”108 Thus, a beneficiary who in good faith brings a complaint for instructions or declaratory judgment merely to clarify the terms of the trust probably has little to worry about.5 But the complaint should not directly or indirectly suggest any particular ordering of the equitable interests.6 Nor should the beneficiary appeal whatever decision the trial court ultimately hands down, particularly if the appeal could result in a diminution of the size or scope of someone's equitable interest 103Malcolm A. Moore, The Joseph Trachtman Lecture—The Origin of Our Species: Trust and Estate Lawyers and How They Grew, 32 ACTEC L.J. 159, 160 (2006). 104See, e.g., Ackerman v. Genevieve Ackerman Family Trust, 908 A.2d 1200 (D.C. 2006) (no-contest clause enforced after beneficiary brought an unsuccessful action to exclude a certain residence from the trust estate, though both the beneficiary and the settlor had testified that the settlor had never intended that the residence be the subject of a trust). Cf. Claudia G. Catalano, What constitutes contest or attempt to defeat will within provision thereof forfeiting share of contesting beneficiary, 3 A.L.R. 5th 590 §11 (noting that an appeal of an order admitting or denying a will to probate could itself constitute the type of contest contemplated by the will's no-contest clause). 105See Restatement (Third) of Property (Wills and Other Donative Transfers) §8.5 cmt. a (suggesting that a clause that purports to prohibit beneficiaries from enforcing fiduciary duties owed to the beneficiaries by the trustee is unenforceable). See, e.g., Callaway v. Willard, 739 S.E.2d...