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Trusts and Estates

A Section of the Virginia State Bar.

Fall Newsletter 2015

Newsletter - Trusts and Estates

Volume 22, No. 13

No Contest Clauses in Virginia After Rafalko v. Georgiadis: Constitutional and Common Law Concerns

By Elwood Earl “Sandy” Sanders, Jr.

No contest or in terrorem clauses in wills and trusts have long vexed the courts in the United States, and Virginia is no exception. The standard form of a no contest clause is that if legal action is taken (or in some cases threatened) to contest the validity of a will or trust document, the beneficiary loses the bequest if the contest fails. Courts are troubled by these clauses because there is a conflict between: (i) the desire to uphold the testator’s or settlor’s right to testamentary freedom and the prevention of family litigation; and (ii) the abhorrence of a legal forfeiture and access to courts for redress of grievances. The Supreme Court of Virginia discussed these clauses in 19561 and 20092 decisions, but revisited the issue in the recent case of Rafalko v. Georgiadis decided on November 5, 2015.3

Rafalko involved a trust which originally allowed the settlor’s two sons and the settlor’s second wife (who was not the sons’ mother) to receive the corpus of the trust share and share alike.4 In 2012, the settlor amended the trust to provide that the sons would not take under the trust until after the death of the much younger second wife.5 The upset sons tried to persuade their father to change his mind to no avail.6 When the father died in late 2012, the sons engaged in several actions to indicate their intent to contest the trust:

• One of the sons sent a letter to the father’s estate planning attorney asking the attorney to preserve all records for a possible contest.7

• The sons wrote a letter to their stepmother asking to terminate the trust by the agreed action of all beneficiaries. If the stepmother did not agree to the trust termination, the sons would seek to have the amendment invalidated due to undue influence and lack of testamentary capacity.8

The sons received an unpleasant surprise when they finally read the trust; the trust had been amended to include a particularly severe no contest clause:

L. No Contest Clause and Release of Claims. I intend to eliminate the possibility that any beneficiary of mine will challenge the decisions that I have made concerning the disposition of my assets during my lifetime or at my death, and my Trustee shall take all appropriate steps to carry out this intent. Accordingly, I direct the following:

1. Absent proof of fraud, dishonesty, or bad faith on the part of my Trustee, if any beneficiary or potential beneficiary under this trust agreement shall directly or indirectly, by legal proceedings or otherwise, challenge or contest this trust agreement or any of its provisions, or shall attempt in any way to interfere with the administration of this trust according to its express terms, any provision I have made in this trust agreement for the benefit of such beneficiary shall be revoked and the property that is the subject of such provision shall be disposed of as if that contesting beneficiary and all of his or her descendants had predeceased me. Absent 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 this provision shall be final.9

It seems that the clause would potentially come into effect for the letter to the stepmother and maybe even the letter to the lawyer who drafted the trust. The no contest clause did not require actual legal action to trigger it. The language also states that the decision of Rafalko (the trustee) is final subject to her acting in bad faith or fraud or dishonesty as to whether this clause comes into play. The trustee did indeed decide after consultation with legal counsel that the sons’ actions had violated the no contest clause.10 As a result, the sons and their descendants would no longer take under the trust.11 The sons then filed suit seeking a declaratory judgment that their actions did not invoke the no contest clause and that the sons and their descendants did not forfeit their interest under the trust.12

The circuit court held that the no contest clause had not been triggered. The clause only applied to the provisions of the amendment and did not apply to the provisions of the trust agreement that had not been amended.13 Upon Rafalko’s request for reconsideration, the trial court held that Rafalko had acted in bad faith when she determined that the sons had violated the no contest clause.14

The Supreme Court in a 4-3 decision, authored by Justice Goodwyn, did not reach the merits of the case. Rather, the Court held that the trustee did not assign error to the trial court’s finding that the no contest clause only applied to the trust amendment and not the provisions of the trust itself.15 Thus, because there is an independent, unappealed basis for the circuit court’s decision, the court cannot do anything but affirm the trial court;16 however, the Supreme Court did cite one of the leading cases on no contest clauses:

No contest clauses in trusts that are part of a testamentary estate plan are given full effect, as they are in wills. Keener v. Keener, 278 Va. 435, 442, 682 S.E.2d 545, 548 (2009). Furthermore, our case law is clear that such clauses, while enforceable, are to be strictly construed. We construe a no contest clause strictly “according to its terms.” Id.

When determining whether a beneficiary’s actions have triggered a no contest clause, we strictly construe the language of the clause because the drafter chose the language and forfeiture is disfavored in the law. Id. at 442-43, 682 S.E.2d at 548-49.17

There is no discussion by the Court on any public policy or constitutional exception to no contest clauses, and none have been cited in Virginia law; however, there is precedent in other states favoring a restrictive view of no contest clauses. Public policy and constitutional issues do exist, and where appropriate, need to be pled and argued.

I. Public Policy and Constitutional Issues

The majority rule in the United States allows and enforces no contest clauses; however, there is an important exception: the clause does not apply if the legal contest was made in good faith and with probable cause.18 Furthermore, the Restatement (Third) of Property agrees: “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.”19 “Probable cause exists when, at the time of instituting the proceeding, there was evidence that would lead a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the challenge would be successful.”20

The Mississippi Supreme Court cited a number of authorities in support of its holding in the case of Parker v. Benoist that no contest clauses are enforceable where good faith and probable cause were present.21 The Mississippi court cited the reasons for upholding no contest clauses:

The Restatement does acknowledge that forfeiture clauses may serve a valuable purpose in deterring “unwarranted challenges to the donor’s intent by a disappointed person seeking to gain unjustified enrichment,” or preventing “costly litigation that would deplete the estate or besmirch the reputation of the donor,” or discouraging “a contest directed toward coercing a settlement—the so-called strike suit.” However, enforcing such a provision without a probable-cause exception would defeat “the jurisdiction of the court to determine the validity of a donative transfer.” Essentially, the Restatement reasons that unlimited enforceability of forfeiture clauses frustrates the fundamental purpose of the courts to ascertain the truth.22

The court discussed the need to truly determine the intent of the testator.23 Further, will contests sound in equity and that equity requires all litigants to act in good faith.24 The court also cited a provision of its state constitution that ensures access to courts.25Virginia has no such provision in its constitution.26

II. Did Virginia Adopt the Good Faith and Probable Cause Exception?

The Supreme Court of Virginia in 1956 discussed the good faith and probable cause exception in Womble v. Gunter,27 and elected not to apply it because it was not pled either at trial or on appeal:

It is unnecessary, however, for the court at this time and in this case to pass upon the question whether good faith, probable cause and reasonable justification afford a defense to a “no contest” provision in a will. This is a question that must be affirmatively established by the parties making the allegation. It was not made an issue in the pleadings other than as heretofore stated. No testimony bearing on the question was introduced except the opinion of one witness, who did not state the facts upon which he based his conclusion, nor was the question raised in the lower court. It is well settled that this court will not determine questions not raised in the court below. “We do not consider matters which are not presented in the pleadings or involved in the issues of the case in the trial court. New contentions first appearing in the petition for appeal are beyond our review of the case.”28

In effect, the question was barred by the contemporaneous objection rule; however, the Court also held that those minor children who contested the will through their next friend were also barred from taking under it.29 The Court called for a strict interpretation of the no contest clause based upon upholding the testator’s intent to distribute the testator’s property as the testator sees fit, but the clause is disfavored because it works a forfeiture.30 The Keener court seemed to say Womble rejected the good faith and probable cause rule on its merits.31

My research did disclose some potential English common law precedent that adopts the good faith and probable cause exception to a no contest provision.32 Because English common law is the rule of decision in this Commonwealth,33 an argument can be made (and it must be cited at trial and on appeal with care) that require Virginia courts to adopt the good faith and probable cause exception to no contest clauses.34

III. Is Knowledge of the No Contest Clause Necessary?

There are no Virginia cases on point, but other states’ precedent is not encouraging with respect to whether a beneficiary’s knowledge of a no contest clause impacts its enforcement.35 In Alper v. Alper, the New Jersey Supreme Court held that the contest of one beneficiary barred all of the other beneficiaries (even a minor child) from taking under the will.36 The court did not draw a distinction between the knowing and unknowing potential takers.

IV. Practice Tips

There are several practice tips that can be learned from the Rafalko opinion:

1. Although no contest clauses are disfavored, they will be strictly enforced. The trial court in Rafalko adopted what could be argued was a strained interpretation of the no contest clause to avoid the issue of its effect37 and the Supreme Court decided the case on the unrelated issues of the existence and sufficiency of the assignment of error probably to avoid the effect of the clause. If you have to draft such a clause, use very clear language as to what constitutes a contest, and that the clause if in an amendment to a trust (or a codicil to a will) applies to the entire trust or will. Do not assume the courts will uphold the no contest clause just because it is in the document.

2. If you are considering challenging a will or trust, make sure you have the most recent version of the will or trust.38

3. If you must litigate in spite of the no contest clause, argue every ethically conceivable point at both trial and on appeal.

4. Finally, the no contest clause may need legislative reform. At least one state has adopted the good faith and probable clause exception as a statute.39 I do not think this article is a proper place to advocate such a reform, but the General Assembly could consider it.

Elwood Earl “Sandy” Sanders, Jr., earned his JD at the University of Alabama in 1983 and is an Appellate Procedure Consultant with Lantagne Legal Printing in Richmond, VA. Sandy is extensively published in law reviews throughout the nation and is also published in several Virginia legal publications such as the Virginia Lawyer and the Criminal Law Newsletter. He was Virginia’s first Appellate Defender, has appellate experience and conducts CL on appellate procedure to local and specialty bar associations. Sandy also teaches online for Nazarene Bible College and was also an adjunct faculty member at the School of Continuing and Professional Studies at the University of Richmond, VCU Business School, and also the T. C. Williams School of Law.

(Endnotes)

1. See Womble v. Gunter, 198 Va. 522 (1956).

2. See Keener v. Keener, 278 Va. 435 (2009).

3. See Rafalko v. Georgiadis, No. 141533 (Va. Nov. 5, 2015).

4. See Rafalko, slip op. at 1.

5. See id.

6. See id. at 2.

7. See id.

8. Id. It is amazing that the sons, one of whom is an attorney, did not first ask for a copy of the trust before they acted.

9. Id. at 2-3.

10. Id. at 4.

11. Id.

12. Id.

13. Id. at 5-6.

14. Id. at 6.

15. Id. at 14.

16. Id. The Supreme Court also held there was sufficient evidence to find bad faith by the trustee in the timing of the decision to invoke the no contest clause (three months) in spite of the sons’ attempt to disavow their earlier letters and threatening actions. The sons also signed releases promising not to challenge the trust legally. Id. at 11-13.

17. Id. at 7.

18. See South Norwalk Trust Co. v. St. John, 101 A. 961 (Conn. 1917).

19. RESTATEMENT (THIRD) OF PROP.: WILLS AND DONATIVE TRANSFERS § 8.5 (AM. LAW INST. 2003). The Uniform Probate Code has codified the enforcement of a no contest clause when there is probable cause. UNIF. PROBATE CODE § 2-517 (UNIF. LAW COMM’N 2010) (“A provision in a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings.”).

20. RESTATEMENT (THIRD) OF PROP.: WILLS AND DONATIVE TRANSFERS § 8.5 cmt. c.

21. 160 So. 3d 198 (Miss. 2015).

22. Id. at 205 (citations omitted).

23. Id. at 206.

24. Id. at 205, 212.

25. Id. at 205 (“All courts shall be open; and every person for an injury done him in his lands, goods, person, or reputation, shall have remedy by due course of law, and right and justice shall be administered without sale, denial, or delay.” (quoting MISS. CONST. art. 3, § 24)). At least one other court applied similar clauses in the state’s constitution. See In re Keenan’s Will, 205 N.W. 1001, 1006 (1925) (“Every person is entitled to a certain remedy in the laws for all injuries or wrongs which he may receive in his person, property or character; he ought to obtain justice freely and without being obliged to purchase it, completely and without denial, promptly and without delay, conformably to the laws.” (quoting WIS. CONST. art. I, § 9)).

26. I suppose a clever litigant could argue due process and access to courts (and should do so), but it is not likely to be successful.

27. 198 Va. 522, 528 (1956).

28. Id. (citations omitted).

29. Id. at 532.

30. See id. at 532. The Court in Rafalko said something very similar in an introductory manner. See Rafalko v. Georgiadis, No. 141533, slip op. at 7 (Va. Nov. 5, 2015).Fairfax County Circuit Court Judge Stanley P. Klein held that Keener was controlling and upheld the no contest clause. See In re Estate of Rohrbaugh, 80 Va. Cir. 253 (2010).

31. See Keener v. Keener, 278 Va. 435, 443 (2009).

32. See Powell v. Morgan, 2 Vern. 90, 23 Eng. Rpt. 668 (Chancery 1688); Morris v. Borroughs, 1 Atkyns. 404 (1739); Loyd v. Spillant, 3 Pere William’s Rpts. 344 (1734).

33. VA. CODE ANN. § 1-200 (English common law is the rule of decision in the Virginia courts unless a decision is repugnant to the Virginia Constitution or Bill of Rights). This statute has teeth in the prior cases. See Weishaupt v. Commonwealth, 227 Va. 389 (1984) (extensive discussion of English cases on martial rape) and Campbell v. Commonwealth, 246 Va. 174 (1993) (After discussion of English common law and the Virginia statutes, the Court held forgery of a public record does not require prejudice to another).

34. It is important to note that this was not argued in Rafalko.

35. In Rafalko, the sons did not know about the no contest clause prior to the activities that were considered triggering events. See Rafalko v. Georgiadis, No. 141533, slip op. at 3 (Va. Nov. 5, 2015) (“Neither Basil nor Paul were aware of the September amendments to the trust until after Paul had sent the letters.”).

36. 65 A.2d 737, 741 (N.J. 1949) (finding that the forfeiture of the minor’s bequest did not violate public policy); see also Tunstall v. Wells, 144 Cal. App. 4th 554 (2nd Dist. 2006) (Alper followed but California has some public policy exceptions to no contest clauses such as forgery; constitutional claims rejected and other cases cited); Commerce Trust Co. v. Weed, 318 S.W.2d 289, 302 (Mo. 1958) (rejecting probable cause exception and barring those taking under the rights of a contesting party from taking under will). I have grave questions on barring innocent beneficiaries for the contest of one particular beneficiary. The U.S. Constitution, art. 3, § 3 forbids “corruption of blood” as a punishment for treason and also forbids a bill of attainder, but those arguments have not yet prevailed over innocents who would have taken from a slayer in administration of the anti-slayer statutes. If applicable, that issue should be researched and argued.

37. See Rafalko, slip op. at 24-25 (Mims, J., dissenting) (“The circuit court ruled that the words ‘this trust agreement’ as used in the September amendment applied only to that amendment itself rather than to the entire trust agreement as amended and restated on August 27, 2012. However, the September amendment is not a trust agreement. . . . Consequently, the words ‘this trust agreement’ as used in the September amendment must refer not to that amendment alone but to that amendment together and collectively with the August 27, 2012 trust agreement it amends.”).

38. Section 64.2-775 of the Code of Virginia requires the trustee to provide the beneficiary with a copy of the trust instrument. I recommend using that statute first before any legal action is taken or threatened.

39. See ARIZ. REV. STAT. ANN. § 14-2517 (adopting section 2-517 of the Uniform Probate Code).