By recent unpublished order in the matter of McMurtrie, v. McMurtrie, the Supreme Court of Virginia reversed a trial court’s ruling that a no contest clause (in terrorem clause) in a trust did not apply to a trust settlor (trust creator).
While unpublished, the order nevertheless provides an instructive analysis of the legal framework for an increasingly common estate dispute scenario: whether a no contest clause in a trust or will has been violated by the actions of a beneficiary. Additionally, this unpublished order also applied certain principles from the Supreme Court’s recent Hunter v. Hunter decision. Notably, Hunter v. Hunter is the case that my colleague Will Sleeth and I litigated successfully up to the Supreme Court of Virginia, and about which my colleague Will Sleeth has written several previous posts (post 5, post 4, post 3, post 2, post 1).
The facts of the McMurtrie case were that a trust settlor (“Settlor”) created a trust (“Trust”) that included a no contest clause. A no contest clause in a will or trust is a provision that seeks to prohibit certain actions on the part of beneficiaries by the threat of disinheritance. Typically, the violation of such a clause results in the offending beneficiary being disinherited and forfeiting his or her interest in the trust or estate. In this case, the no contest clause provided that any beneficiary, legatee, or devisee would forfeit their interest in the Trust, and any interest of their descendants, if they sought to impair or invalidate any Trust provision. As a side note, this is a fairly common no contest clause provision.
The Settlor named three co-trustees (“Co-Trustees”) (none of whom were the Settlor) for the Trust. The Trust provided that the Settlor was the sole beneficiary during his lifetime. Later, the Settlor requested the distribution of the Trust’s principal (the assets of the trust) to himself. One of the Co-Trustees, however, refused to distribute anything to the Settlor on the basis that such co-trustee had the absolute discretion to distribute the assets of the Trust.
As a result, the Settlor filed suit in Chesterfield Circuit Court (the “Trial Court”), seeking a declaratory judgment that the no contest clause of the Trust did not apply to him. The Co-Trustees filed an answer, and the Settlor moved for summary judgment (a motion seeking judgment on the basis that there is no genuine issue of material fact in dispute, and that such moving party is entitled to judgment as a matter of law).
The Settlor made three arguments in the case. First, he argued that a no contest clause cannot apply to him as the trust settlor. Additionally, and in the alternative, he argued that the no contest clause is not applicable to a claim under Virginia Code Section 64.2-729, and that the no contest clause does not apply to his claim against the Co-Trustees for breach of fiduciary duty. For context, Virginia Code Section 64.2-729 relates to the modification or termination of an irrevocable, non-charitable trust.
The Trial Court granted summary judgment in favor of the Settlor, and ruled that the no contest clause did not apply to him. Additionally, the Trial Court ruled that the following proposed actions of the Settlor did not violate the no contest clause: (i) his filing of the motion for summary judgment, (ii) actions brought regarding the Co-Trustees’ administration of the Trust or breach of their fiduciary duties, and (iii) actions brought under Virginia Code Section 64.2-729. The Co-Trustees appealed to the Supreme Court of Virginia.
On appeal, the Co-Trustees argued that the Trial Court erred by essentially re-writing the no contest clause to exclude the Settlor from the reach of the no contest clause. Contrarily, the Settlor argued that the no contest clause doesn’t apply to him because he is defined in the trust as the “Trustor”, and not as a beneficiary, and that the no contest clause applies to beneficiaries, devisees, and legatees (and implicitly, not the “Trustor”).
On appeal, the Supreme Court of Virginia (the “Appellate Court”) began its analysis with the cardinal principle that if the language is clear, a court will apply the plain meaning of the trust’s words. Additionally, the Appellate Court, citing Hunter v. Hunter, referenced the principle that a no contest clause will be strictly enforced and strictly construed according to its terms.
The Appellate Court looked closely at the language of the no contest clause and its limiting language applying to “any devisee, legatee, or beneficiary”. The Appellate Court then analyzed the definition of “beneficiary”, and noted that such term meant anyone designed to receive advantages from something or a person intended to obtain income from a trust. In strictly construing the language of the no contest clause, the Appellate Court held that it was clear that Settlor is a “beneficiary” of the Trust, since he was the sole beneficiary of the trust during his lifetime. As a result, the Appellate Court held that the no contest clause applied to Settlor.
On this narrow ground, the Appellate Court reversed the Trial Court’s decision. What is interesting is that the Co-Trustees did not appeal the issues of whether a claim for breach of fiduciary duty against the Co-Trustees, and a claim brought pursuant to Virginia Code Section 64.2-729, would run afoul of the no contest clause. As a result, the Trial Court had effectively held that the Settlor may bring those claims without invoking the no contest clause. It would have been interesting to see how the Appellate Court might have decided those particular issues had they been appealed. As a side note, as a general principle, the Supreme Court of Virginia generally may only decide issues that are properly appealed and preserved.
This order provides a useful analysis of how no contest clauses are interpreted and applied under the principles espoused by Hunter v. Hunter and other common law. The applicability of no contest clauses to trusts and wills is a complicated legal issue. If faced with such a dispute, it is best to speak with an experienced estate dispute attorney.
