Any Question?, Part II.

As predicted in Part I, the court of appeal issued its published decision in my client's [the appellant] favor. The appellate opinion reversed the trial court by a 3-0 vote.

The case involved two primary questions: (1) whether there was a "no contest" clause incorporated into subtrusts; and if so, (2) whether a proposed petition constituted a "contest". The court of appeal ruled in our favor on both questions. Here are the "greatest hits":

"In granting [Respondent's] safe harbor application, the trial court found neither of the two [sub]trusts [B and C] contains a “no contest” clause and, moreover, even if the clause did apply, the proposed petition does not constitute a “contest” as defined in the Probate Code. Because the trial court erred in granting the application for safe harbor, we reverse.

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"[Appellant] argues the trial court erred in granting [Respondent] safe harbor to file the proposed petition. She asserts the trial court erred in finding that the Trust’s “no contest” clause did not apply to the subtrusts and the proposed petition did not constitute a “contest” under the terms of that clause. [Appellant's] claims have merit.

1. Whether There Was a No Contest Clause Applicable to the Subtrusts?

"[Respondent's] argument for interpreting the “no contest” clause as inapplicable to Trusts B and C is beguilingly simple. He contends that because the Trust does not explicitly state the “no contest” clause applies to the subtrusts, it must be strictly construed as applying only to the original trust. But such a construction not only ignores the trustors’ intent as revealed in “the whole of the trust,” it is also patently unreasonable.

"The trustors’ intent that the “no contest” clause applies to the subtrusts is implicit in the terms of the Trust. This document, a revocable instrument, created and funded the three subtrusts upon the first trustor’s death. (Trust, ¶ 4.02(b).) At operation, Trusts B and C were irrevocable, and a host of provisions in the original trust immediately came into play, establishing rules for the administration of the subtrusts. For example, paragraph 4.02(b) directed that each of the subtrusts “shall constitute and be held, administered and distributed by the Trustee as a separate Trust.” Paragraphs 4.04 and 4.05 established distribution rules for the assets and principal of Trusts B and C. Most importantly, for our purposes, paragraph 6.05 prohibited any beneficiary entitled to “any distributions . . . or any benefits under this trust instrument” from “contest[ing] in any court any of the provisions of this instrument[.]” Taken together, these provisions reveal the trustors’ intent that the Trust should govern the trustee’s administration of the subtrusts upon their creation and funding.

"This conclusion the “no contest” clause applies to the subtrusts is the only reasonable construction of the clause. Because the original trust was revocable, a “contest” was never a possibility during the joint life of the trustors. Only upon [one of the trustor's] death, when the remainder beneficiaries gained their irrevocable interests in Trusts B and C, did the possibility of a “contest” pose a risk to the trustors’ plan for the assets they placed in trust. Ascertaining the intent of the trustors, as we must, from “the whole of the trust instrument,” we conclude the “no contest” clause applies to Trust B and C.

"McIndoe v. Olivos (2005) 132 Cal.App.4th 483 (McIndoe) bolsters our conclusion. In McIndoe, the husband and wife trustors of a revocable family trust created and funded two separate trusts, a “survivor’s trust” and an “exempt trust,” upon the death of the first spouse, a plan that differs from the [one here] only in the number of subtrusts created, two rather than three. The McIndoe family trust, also like the [original here], included a no contest clause that did not specifically state that it applied to the subtrusts. After the death of the first spouse in McIndoe, the surviving spouse repeatedly exercised her right to amend the revocable “survivor’s trust,” which held her separate property and share of the trustors’ community property. These amendments favored one sibling beneficiary over the other, and when the surviving trustor died, the disadvantaged beneficiary challenged the amendments on the ground of undue influence. The disadvantaged beneficiary sought a safe harbor determination that her proposed contest to the heavily amended survivor’s trust would not constitute a contest to the exempt trust. The court agreed, based on the terms of the original trust.

"Importantly for our purposes, the court in McIndoe affirmed that “the no contest clause in the original trust applies to challenges to the original trust, the exempt trust and the survivor’s trust,” even though the no contest clause there did not specifically state it applied to the subtrusts. (McIndoe, supra, 132 Cal.app.4th at p. 487.) The court stated, “The no contest clause was located in the ‘general provisions’ section of the trust document, which specified that all general provisions ‘apply to each trust established hereunder[.]’ . . . Because the no contest clause of the original trust applied to all subtrusts, there was no need to add a no contest clause to the exempt trust.” (Id. at p. 488.)

"Like the “no contest” clause in McIndoe, the “no contest” clause in the present case was also located in a “general provisions” section of the Trust –– Article 6, entitled “MISCELLANEOUS PROVISIONS.” (Trust, ¶¶ 6.01-6.06.) Though Article 6 did not specify that its provisions applied to each subtrust, that intent was implied in the provisions themselves, and from the instrument as a whole, as explained above. Consequently, McIndoe supports our finding that the “no contest” clause applied to Trusts B and C. (See also Scharlin, supra, 9 Cal.App.4th 162, 170-171 [where original trust created two subtrusts, revocable survivor’s trust, and irrevocable decedent’s trust, “no contest” clause in original trust controls decedent’s trust].)"

2. Whether the Proposed Petition Constituted a "Contest"?

"[Respondent] argues his proposed petition is not a “contest” because it “does not challenge, either directly or indirectly, the validity of the Original Trust[.]” He asserts his petition “does not seek to invalidate any provision of the Original Trust . . . and, instead, seeks to ensure that the testator’s intent as expressed in the Original Trust . . . is properly carried out.” Thus, [Respondent] contends that if he obtains all the relief requested in his petition, “the separate trusts will remain unaltered, and the various trust beneficiaries will receive only what they are due under the Original Trust . . . .” His argument does not ring true.

"The proposed petition directly contravenes an express directive in the Trust: that his brother [ ] serve as successor trustee in the event of [Appellant's] “death, inability or unwillingness . . . to act as Trustee[.]” (Trust, ¶ 7.02.) This provision clearly expresses the trustors’ intent regarding who will serve as their successor trustee, yet [Respondent] tries to thwart this intent with a two-fold attack.

First, [Respondent] asserts the Trust does not “provide for a Trustee to Trusts B/C or a successor,” and that paragraph 7.02 applies only to the original trust, not to the subtrusts. (Italics omitted.) He argues paragraph 7.02 “governs only the [ ] Family Trust [A] and that none of the terms of that Trust were referred to or incorporated into Trusts B/C which were Expressly created to be held separate and a part [sic] from the [ ] Family Trust.” (Italics omitted.) In other words, [Respondent] asserts the Trust designates neither a trustee nor a successor trustee to administer the subtrusts. But this argument flatly contradicts much of Article 4 of the Trust, which details how the trustee is to hold and administer the three subtrusts. (See, e.g., ¶ 4.02 (b) [upon first trustor’s death, trustee shall divide Trust estate into three subtrusts, each of which “shall . . . be held, administered and distributed by the Trustee”].)
"[Respondent's] second attack on the successor trustee provision directly contradicts the trustors’ intent. [Respondent] argues that if paragraph 7.02 does apply to the subtrusts, and [Brother] is found to be the successor trustee, then the court should find [Brother] “unfit” to serve because he lacks the necessary education and skill to perform his duties. [Respondent] also alleges [Brother] lacks “the requisite good faith and impartiality,” as evidenced by his “openly and outrageously hostile [attitude] toward [Respondent].”

"For many, the decision of who will serve as trustee or successor trustee is a significant one. Here, [the trustors] made clear their intention that their son, [Brother], would follow one of them as successor trustee. [Respondent's] assertion the court should ignore this intent and override paragraph 7.02 because he considers [Brother] prospectively unfit is indisputably a contest of one of the provisions of the Trust. It follows that the trial court erred in granting [Respondent] safe harbor to file his proposed petition."

In Part III, I will include excerpts from my brief for the reader to see how the court of appeal closely hewed to my arguments centering on my theme that one must reasonably interpret the trust instrument, the petition and governing authority.