This is the third in a three-part series of blog posts on “no contest” clauses. In this post, I’ll discuss some of the key points in the dissenting opinions in the recent Virginia Supreme Court ruling in the Rafalko case (777 S.E.2d 870) relating to no contest clauses.
In Rafalko, the Virginia Supreme Court confronted the issue of whether certain actions violated a trust’s no contest clause. Part two of this series discussed the main takeaways from the majority opinion:
- (1) mere discourse relating to a challenge of a trust containing a no contest clause does not trigger the no contest clause itself; and
- (2) the trustee did not properly assign error to the holding of the trial court that a no contest clause, which was added by amendment to a trust, and which referenced “this trust agreement,” did not apply to any challenges to any prior, pre-amendment versions of that trust.
Justice Mims wrote a dissenting opinion that raised several interesting issues. First, the dissent examined the language of the trust that provided the trustee with wide authority to determine whether the no contest clause had been triggered. The trust stated:
“[a]bsent proof of fraud, dishonesty, or bad faith on the part of my Trustee, the decision of my Trustee that a beneficiary or potential beneficiary is not qualified to take a share of the trust assets [under the no-contest clause] shall be final.”
The dissent cited to Virginia Code 64.2-777(B) (which provides that a trustee may only exercise a power subject to the fiduciary duties imposed by the Virginia Uniform Trust Code) to argue that the language of the trust (which limited the grounds for a challenge to the trustee’s determination to those on the basis of “fraud, dishonesty, or bad faith”) improperly restricted a trust beneficiary’s right to contest the trustee’s determination on the basis that such a decision conflicted with the much broader array of fiduciary duties enumerated in the Virginia Uniform Trust Code.
The issue that Justice Mims’s dissent raised is a significant one. Increasingly, estate planning attorneys are drafting no contest clauses that (like the one at issue in Rafalko) grant the trustee himself wide latitude to determine whether the no contest clause should be invoked, as well as no contest provisions that not only encompass challenges to the underlying trust instrument itself, but also challenges to the actions of trustees in administering the trust. The dissent’s position provides ammunition to estate litigators seeking to contest the broad scope of such no contest clauses. Some day in the future, we may see Justice Mims’s argument cited in a majority Virginia Supreme Court opinion declaring an overly restrictive no contest clause as invalid.
The majority opinion did not address Justice Mims’s invocation of Virginia Code 64.2-777(B). Rather, the majority opinion discussed the same concept from a somewhat different angle by invoking Virginia Code Section 64.2-703(B)(2) (which provides that the terms of a trust do not prevail over “[t]he duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”). The majority opinion held that on the basis of Virginia Code Section 64.2-703(B)(2), the trust beneficiaries’ complaint pled sufficient facts to survive demurrer, notwithstanding the lack of any direct pleading that the trustee – in invoking the no contest clause – acted on the basis of “fraud, dishonesty, or bad faith.”
Justice Mims’s dissent proceeded to find that in this case, the trial court erred in finding that the trustee breached any fiduciary duty in invoking the no contest clause. His dissent also addressed the issue of whether the reference in the trust’s no contest clause to “this trust agreement” applied to the challenge to the prior pre-amendment version of the trust. The dissent argued that the amendment “is not a trust agreement. Standing alone, it contains none of the elements required to create a trust.” Accordingly, the words “this trust agreement” must refer not only to that amendment “but to that amendment together and collectively with the August 27, 2012 trust agreement it amends.”
Justice Kelsey also authored a dissent, in which he was joined by Justice McClanahan. That dissent held that nothing in the language of the no contest clause at issue violated either Virginia Code 64.2-777(B) (which was invoked in Justice Mims’s dissent) or Virginia Code 64.2-703(B)(2) (which was invoked by the majority opinion). The dissenting opinion noted that the provision (providing for the trustee’s authority to invoke the no contest clause) provides protections for trust beneficiaries by providing that the trustee’s determination cannot be a product of “fraud, dishonesty, or bad faith.” The dissent held that these safeguards were sufficient under Virginia law.
Notably, Justice Kelsey’s dissent was careful to emphasize the protections afforded to trust beneficiaries as it related to the trustee’s discretion to invoke the no contest clause. In addition to emphasizing the “fraud, dishonesty, or bad faith” language, the dissent also discussed Virginia case law relating to courts’ equitable power to ensure that trustees act in good faith, notwithstanding a grant of discretionary authority to the trustee under the terms of the trust. In sum, Justice Kelsey’s dissenting opinion would have granted greater deference (than the majority opinion) to trustees to determine when a no contest clause may be invoked, while still ensuring the presence of safeguards to ensure that trustees do not exercise such discretion in bad faith.