This post is part 3 in our 7-part series on the Virginia Supreme Court’s ruling in Hunter v. Hunter (Record No. 190260). Today we focus on an extremely important portion of the ruling that discussed concerns about how expansively-worded no contest clauses could protect unscrupulous trustees. To my knowledge, this is the first time that this concept has ever been addressed in a written opinion interpreting Virginia law, so this is a very significant development.
For years, we’ve written on this blog about the dangers that increasingly-broadly-worded no contest clauses pose. The concern lies, in short, in the fact that unscrupulous fiduciaries could seek to hide behind a no contest clause in order to deter a will or trust beneficiary from holding the fiduciary accountable for misconduct. Conventionally, no contest clauses applied to challenges to the underlying validity of a will or trust itself. In the last decade or so, we’ve seen an explosion in no contest clauses that purport to be triggered by challenges to conduct by a fiduciary, or contests to instruments (such as beneficiary designations or right of survivorship designations) that are completely separate and apart from the instrument that contains the no contest clause.
In our assignments of error in the Hunter case, we raised this issue. While the Virginia Supreme Court did not reach that assignment of error, I was thrilled to see it discuss the concept and point out the potential problems that overly-broad no contest clauses could pose.
The Court began its discussion of this issue by pointing out the different dynamic created by no contest clauses in trusts compared to in wills:
The principle of strict construction applies with compounding force to no-contest provisions in trusts. We have recognized that no-contest provisions are prima facie valid in trust instruments just as they are in wills. See Keener, 278 Va. at 442. That recognition, however, was of recent provenance. We have yet to address how the unique attributes of trusts should factor into the legal analysis or to consider the distinguishing fact that
trusts differ from wills because they usually last for an extended period of time and because, during that period, they vest ownership and control of the property in the hands of a trustee. Indeed, the fiduciary relationship between the property’s legal owner — the trustee — and the property’s beneficial owners is the cornerstone of trust law. The rising use of expansive trust forfeiture clauses is problematic because by disinheriting beneficiaries who seek oversight of this fiduciary relationship, the clauses threaten to forfeit trust altogether.
Deborah S. Gordon, Forfeiting Trust, 57 Wm. & Mary L. Rev. 455, 474 (2015) (footnotes omitted).
This language quotes from a very thoughtful law review article that was published in the William & Mary Law Review several years ago. The law review article states that an overly-broad no contest clause that “discourages breach of duty claims against trustees by dictating that anyone who files such a claim forfeits her beneficial interest allows fiduciaries to escape oversight, thereby forfeiting the very qualities that define trust law in the first place.”
The Hunter opinion then contained a footnote (footnote 5) that cited six sources that also discuss the issue. The footnote states:
Courts and commentators have struggled with this issue. See, e.g., Callaway v. Willard, 321 Ga. App. 349, 739 S.E.2d 533, 536-37 (Ga. Ct. App. 2013); Restatement (Third) of Trusts § 96(2) & cmt. e (2012); Bogert et al., supra note 4, § 965, at 108-09 (3d ed. 2010); George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 973, at 248-49, 252-53 (2d ed. 1962); Charles E. Rounds, Jr. & Charles E. Rounds, III, Loring and Rounds: A Trustee’s Handbook § 5.5, at 436 (2018 ed.); Lynn Foster, Arkansas’s Trust Code and Trust Planning: A Ten-Year Perspective, 38 U. Ark. Little Rock L. Rev. 301, 342 (2016). Given our narrow holding, we leave for future consideration how, if at all, these observations affect the ultimate scope of no-contest provisions in trust instruments that seek to shelter fiduciary misfeasance or malfeasance.
Let’s examine several of these sources:
Callaway v. Willard, 321 Ga. App. 349, 739 S.E.2d 533, 536-37 (Ga. Ct. App. 2013)
In this case, the Georgia Court of Appeals heard an appeal of a declaratory judgment action filed by a trustee seeking a ruling that trust beneficiaries triggered a no contest clause in a trust. While the trust beneficiaries did not directly contest the trust at issue, the trustee nonetheless contended that they had triggered such through filing a guardianship petition seeking guardianship over the trust settlor. The trial court held that in so doing, the trust beneficiaries did not trigger the no contest clause, and the Court of Appeals affirmed.
The Virginia Supreme Court’s citation to the case specifically cited to pages 536-537. In those pages, the Georgia Court of Appeals discussed the state of no contest clauses in Georgia, and discussed how the Georgia Supreme Court “has held that, as a matter of public policy, [no contest clauses] may not be construed so as to immunize a fiduciary from the law that imposes certain duties upon and otherwise governs the actions of such fiduciaries” (citing Sinclair v. Sinclair, 284 Ga. 500 (2008)).
Restatement (Third) of Trusts § 96(2) & cmt. e (2012)
Section 96(2) of the Restatement (Third) of Trusts provides: “A no contest clause shall not be enforced to the extent that doing so would interfere with the enforcement or proper administration of the trust.”
Comment (e) provides:
In most jurisdictions, no-contest (or “anti-contest” or, somewhat inaptly, “in terrorem“) clauses are valid and generally enforceable, although subject to various statutory or common-law limitations. See, e.g., Restatement Third, Property (Wills and Other Donative Transfers) § 8.5, which states: “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 donative document is enforceable unless probable cause existed for instituting the proceeding.” See also id., Comments b and c. That such clauses are “construed narrowly, consistent with their terms,” and on other matters, see id., Comments d-i; and see id., Reporter’s Notes 2 and 3 to Comment b, recognizing that the validity of no-contest clauses is not universally accepted, nor is (where these clauses are valid) the probable-cause exception.
The rule of Subsection (2) provides only that an otherwise enforceable no-contest clause is unenforceable insofar as doing so would inhibit beneficiaries’ enforcement of their rights under a trust (whether created by the will or other instrument) or would otherwise undermine the effective, proper administration of the trust. Suits to enforce the duties of trustees, or to determine the proper meaning or effect of the terms of a trust or to enforce those terms, normally have the effect of seeking to ascertain and implement settlor intentions and trust provisions under the instrument–rather than constituting a “contest” or challenge to the instrument or its provisions.
Accordingly, a no-contest clause ordinarily (see Reporter’s Note, final paragraph) is unenforceable to prevent or punish: a beneficiary’s petition for instructions (§ 71, even though, for example, it seeks an interpretation contrary to the trustee’s interpretation–and see further Reporter’s Note to this Comment); a demand for or challenge to a trustee’s accounting (§ 83); a suit to enjoin or redress a breach of trust (§ 95); a petition for removal of a trustee for unfitness or for repeated or serious breach of trust (§ 37); a suit alleging that a trustee’s particular exercise of discretion or even “absolute” discretion constituted an abuse of discretion (§ 87); or the like. Similarly, a beneficiary’s allegation that a trustee’s misconduct exceeded the standard of misconduct permissibly protected by an exculpatory clause (Comments b and c) is not a contest of that provision of the instrument. See generally § 27(2); § 27, Comment b, and Reporter’s Note thereto. See also Restatement Third, Property (Wills and Other Donative Transfers) § 8.5, Comment d, on suits to construe, reform, or modify.
The rule of this Subsection (2) does not prevent enforcement of a no-contest clause insofar as it would, absent probable cause, exact forfeiture: (a) for a beneficiary’s challenge to the validity of a trust or trust provision on grounds of incapacity (§ 11), lack of due execution (§§ 17-23), or forgery, fraud, undue influence, or other wrongful procurement (§ 12); or (b) for a beneficiary’s claim either (i) as a creditor or (ii) as the owner of property that the settlor intended to include in the trust, provided, in either case, that the no-contest clause is clearly intended to apply to such a claim.
The language in this comment is quite helpful in illustrating scenarios where litigants could argue that trial courts should decline to apply a no contest clause.
George Gleason Bogert et al., The Law of Trust and Trustees § 965, at 108-09 (3d ed. 2010)
This source is a treatise on trusts. The June 2019 Update Edition contains a helpful discussion of the importance of accountability of the trustee: “A trust necessarily grants rights to the beneficiary that are enforceable in equity. If the trustee cannot be called to account, the beneficiary cannot hold the trustee to any standard of conduct with regard to the trust property or sue for breach of trust. Rather, without accountability, the trustee may ignore the terms of the trust and do as the trustee likes with the trust property, with the beneficiary and the court being unable to determine whether there has been a breach of trust. Consequently, as a practical matter the beneficiary and the court will be unable to hold the trustee liable for breach, without regard to how clearly and how significantly the trustee may have breached its trust.”
Charles E. Rounds, Jr. & Charles E. Rounds, III, Loring and Rounds: A Trustee’s Handbook § 5.5, at 436 (2019 ed.)
This source is also a treatise on trusts. The Court’s footnote references page 436, which contains a discussion of several topics, including whether a no contest clause is triggered when a purported contest is withdrawn, and whether a contest to a pour over will could trigger a trust’s no contest clause. Page 435 contains an interesting discussion on “equitable unenforceability” of no contest clauses, stating: “Under the Restatement (Third) of Trusts, a no-contest clause is not per se unenforceable. It would, however, be unenforceable “to the extent that . . . [enforcing it] . . . would interfere with the enforcement or proper administration of the trust.”
Lynn Foster, Arkansas’s Trust Code and Trust Planning: A Ten-Year Perspective, 38 U. Ark. Little Rock L. Rev. 301, 342 (2016)
This is a law review article that examines the state of trust law in Arkansas approximately ten years after Arkansas adopted its version of the Uniform Trust Code. The issues discussed on page 342 arose in an Arkansas case titled Peterson v. Peck. In that case, the trust contained a no contest clause that said it would encompass any conduct challenging any trust provisions, attacking the validity of the trust, or attempting to remove or question any of the actions of the trustee (who was the trust settlor’s widow). The settlor’s daughter asked for an accounting and requested damages to restore funds to the trust that were allegedly lost by the trustee’s investment in a Ponzi scheme.
The trial court ruled that the daughter had triggered the no contest clause and the Court of Appeals of Arkansas affirmed on the basis that the daughter questioned the trustee’s actions and asked the court to control her actions as trustee. The article proceeds to criticize the court’s holding, stating: “The court characterizes requesting an accounting, an act that was not expressly forbidden by the no-contest provision, as an act questioning a trustee’s actions. But a trustee has a duty to account. Asking a trustee to carry out a duty should not be characterized as an action adverse to a trustee.” The article further stated: “After all, rendering a trustee completely free from any duty to account whatsoever effectively destroys the trust. As Bogert states, ‘there is a fundamental and irreconcilable contradiction to a settlor purporting to create a trust with respect to which the trustee is not accountable.’ In other words, drafters and courts should be aware that the common law of trusts may provide a “floor” under which an extremely broad no-contest clause cannot fall. A no-contest clause cannot make duties like loyalty and accounting completely disappear.”
The article also commented: “Furthermore, a consideration courts should make in this context is that a no-contest clause in a trust, much more so than in a will, functions as a type of exculpatory clause for the trustee. By including a laundry list of triggering acts, a drafter can insulate a breaching trustee from scrutiny by a court. Before drafting such no-contest clauses, clients should be advised as to their potential effects, and courts should not enforce them if the effect is to vitiate the trust itself.”
Back to the Hunter Opinion
After referencing these secondary sources in the Hunter opinion, the Virginia Supreme Court then stated that it did not need to squarely address the issue in this case:
Although Chip advances several arguments in this case that build upon this premise, we need not address the outer boundaries of no-contest provisions in trust instruments. We instead focus our attention on the narrow dispute before us and ask only whether the circuit court correctly ordered the forfeiture of Chip’s interest in the Theresa Trust pursuant to this particular trust’s no-contest provision.
While the Virginia Supreme Court did not make any rulings on the issue, its discussion of the issue is significantly helpful for future cases involving broad no contest clauses. To my understanding, there previously was not any written opinion in Virginia that addressed concerns about overly-broad no contest clauses. In Hunter, the Virginia Supreme Court squarely acknowledged the issue and by its citations to secondary sources (all of which discussed concerns about overly-broad no contest clauses) appeared to indicate that, at a minimum, courts should scrutinize such overly-broad clauses.
For the trusts and estates bar, the Hunter opinion is a gold mine, the depths of which will be mined for years and decades to come in future litigation that fleshes out the issues discussed in the opinion. On this issue alone (broad no contest clauses), we will likely see further litigation for decades to come as the trial courts and the Supreme Court flesh out the law in this area. Stay tuned for the remaining 4 parts in our 7 part series on the Hunter opinion, as we discuss how the Court touched on further areas of the law that will likely be developed in the years and decades to come.