Opinion
No. B228704.
2012-03-23
Annemarie DONKIN et al., Plaintiffs and Respondents, v. Rodney E. DONKIN, Jr., et al., as Trustees, etc., Defendants and Appellants.
Snow Law Corp. and Stephen L. Snow for Defendants and Appellants. Mark H. Boykin, Woodland Hills, for Plaintiffs and Respondents.
Background: Trust beneficiaries filed a “safe harbor” petition to determine if their challenge to the trustee's administration would amount to a “contest” under the trust's no contest provisions, and trustees filed a petition for instructions concerning the applicability of new law which eliminated “safe harbor” provision. The Superior Court, Los Angeles County, No. BP109463, Reva G. Goetz, J., found the challenge would not constitute a contest, and denied the petition for instructions. Trustees appealed.
Holdings: The Court of Appeal, Johnson, J., held that:
(1) trustees had standing;
(2) beneficiaries had standing;
(3) former safe harbor law applied;
(4) challenges to settlor's ability to amend the trust, the trustees' failure to make distributions, and settlor's failure to create subtrusts would constitute a contest under trust's no contest clause; and
(5) contention that trust's second amendment did not apply because settlor lacked to the power to amend the trust was prohibited by trust's no contest clause.
Affirmed in part and reversed in part. Snow Law Corp. and Stephen L. Snow for Defendants and Appellants. Mark H. Boykin, Woodland Hills, for Plaintiffs and Respondents.
JOHNSON, J.
Appellants Rodney E. Donkin, Jr. and Vicki Donkin are successor trustees of the Donkin Family Trust dated August 15, 1988 (Trust), which was created by Rodney Donkin, Sr. and Mary Donkin. The Trust contains a “no contest” clause disinheriting any beneficiary who challenges the Trust, its provisions, or its asset distribution. In 2009, two of the beneficiaries, Annemarie Donkin and Lisa Donkin Kim, filed a “safe harbor” petition pursuant to Probate Code section 21320
to determine if their challenge the Trustee's administration of the Trust would constitute a contest under the Trust's no contest provisions. While the beneficiaries' petition was pending, the Probate Code was amended to eliminate the safe harbor mechanism, and the trustees filed a petition for instructions concerning the applicability of the new law. The trial court—apparently applying the former law regarding will contests—ruled on the beneficiaries' safe harbor petition, found the beneficiaries' challenge would not constitute a will contest, and denied the trustee's petition for instructions.
All statutory references herein, unless otherwise noted, are to the Probate Code.
The trustees contend the trial court erred in (1) failing to rule on their petition for instructions prior to the granting of the safe harbor petition; (2) failing to determine whether the new law applied to the Trust; and (3) concluding the beneficiaries' proposed challenge to the trustees did not violate the Trust's no contest provisions. As a consequence, the trustees request that we find as a matter of law the former law applies and the proposed challenges violate the Trust's no contest provisions. We find that the old law applies, and under the old law's safe harbor provisions, certain of the beneficiaries' challenges to a trust amendment would constitute a prohibited contest if they were pursued by the beneficiaries.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Factual Background
Decedents Mary E. Donkin and Rodney E. Donkin, Sr. (Settlors), husband and wife, as settlors created a revocable Trust on August 15, 1988, which by its terms became irrevocable upon the death of both spouses. Mary and Rodney, Sr.
were the original trustees of the Trust. The primary beneficiaries of the Trust under its first amendment dated May 10, 2002, were the Settlors' children Rodney E. Donkin, Jr., Lisa B. Kim, and Annemarie N. Donkin. After the death of Rodney, Sr., on August 26, 2002, Mary amended the Trust on December 17, 2004 (Second Amendment). After Rodney, Sr. died, Mary served as sole Trustee of the Trust, and Mary died on February 5, 2005.
As several of the parties share the same last name, to avoid confusion we refer to them by their first names.
The Trust specified that with respect to “Resolution of Conflict,” any controversy between the trustees and any beneficiary “involving the construction or application of any of the terms, provisions, or conditions of this trust shall, on the written request of either or any disagreeing party served on the other or others, be submitted to arbitration.” (Arbitration Clause).
The Trust further specified with respect to “Litigation” that the Settlors desired that “this Trust, the Trust Estate and the Trust administrators and beneficiaries shall not be involved in time consuming and costly litigation concerning the function of this Trust and disbursement of the assets. Furthermore, the Settlors have taken great care to designate, through the provisions of this Trust, how they want the Trust Estate distributed. Therefore, if a beneficiary, or a representative of a beneficiary, or one claiming a beneficial interest in the Trust Estate, should legally challenge this Trust, its provisions, or asset distributions, then all asset distributions to said challenging beneficiary shall be retained in Trust and distributed to the remaining beneficiaries herein named, as if said challenging beneficiary and his or her issue had predeceased the distribution of the Trust Estate.” (No Contest Clause).
The Second Amendment deleted the “ ‘Allocation of Trust Assets' ” from the original Trust and replaced it with the following, after Rodney, Sr.'s death:
“ Allocation of Trust Assets [¶] When the above conditions are satisfied, the debts and obligations of the Trust Estate have been paid, and any special bequests have been distributed, the Trustee shall have the complete discretion whether to keep the assets of the trust estate intact and continue to manage them for the equal benefit of the designated Primary Beneficiaries. When the trustee determines it is appropriate to liquidate any or all of the assets in the trust, the Trustee shall allocate and divide those liquidated assets into separate trust shares so as to provide one share in trust for each of the designated Primary Beneficiaries living at the death of the Surviving Settlor, and one share in trust for each deceased Primary Beneficiary with issue surviving. The trustee may, within its sole discretion continue to manage and invest the liquidated assets as it deems appropriate. The trustee may, within its sole discretion, distribute income and/or principal from the trust share to the individual beneficiaries.”
The Second Amendment also added to the provision for asset distribution, a clause entitled “ No Contest—Contestant Disinherited,” which provided that, “If any beneficiary, in any manner, directly or indirectly, contests or attacks this instrument or any of its provisions, any share or interest in the trust given to that contesting beneficiary under this instrument is revoked and shall be disposed of in the same manner provided herein as if that contesting beneficiary had predeceased the settlor.”
The Trust confers discretionary powers on the trustee and gives specific directions concerning distribution of Trust assets to the beneficiaries. The Trust gave the trustees power to hold, improve, invest, lease, manage and make distributions of Trust assets. The Second Amendment to the Trust gave the trustees, after the payment of the Trust's debts and obligations, “complete discretion whether to keep the assets of the trust estate intact and continue to manage them for the equal benefit of the designated Primary Beneficiaries.”
Under the Trust, the successor trustees had a duty to render an annual accounting to the beneficiaries not more than 120 days after the close of the fiscal year of the Trust.
The Trust provided that upon the death of either Settlor, the trustee would divide the estate into two separate trusts, the Survivor's Trust A and the Decedent's Marital Share (consisting of one-half of the community property of the estate) which would be divided into two trusts, Decedent's Trust B and Decedent's Trust C. Upon the creation of Trust B and Trust C, such trusts became irrevocable.
Upon Mary's death, Rodney, Jr. and his wife Vicki became successor trustees of the Trust (Trustees).
B. Procedural History
On March 5, 2008, Annemarie Donkin and Lisa Kim, two of the three beneficiaries of the Trust (beneficiaries) filed a “safe harbor” petition under former section 21320
to determine whether the filing of their proposed petition to compel a proper accounting from the successor trustees, fix the compensation of the successor trustees, remove the successor trustees, and for distribution of a portion of the Trust assets would violate the No Contest Clause of the Trust. The Trustees responded that the beneficiaries were required to arbitrate pursuant to the Arbitration Clause. The beneficiaries withdrew their petition before the scheduled hearing.
Former section 21320, subdivision (a) provided: “If an instrument containing a no contest clause is or has become irrevocable, a beneficiary may apply to the court for a determination of whether a particular motion, petition, or other act by the beneficiary ... would be a contest within the terms of the no contest clause.”
On February 26, 2009, the Trustees wrote to the beneficiaries, requesting arbitration of the dispute over the Trustees' management of the Trust. Thereafter, during the period February 2009 to May 2009, the beneficiaries threatened litigation in order to obtain distributions of the Trust assets pursuant to the Trust, removal of the Trustees, and reduction of the Trustees' compensation. On May 22, 2009, the beneficiaries demanded that the Trustees initiate arbitration.
On June 25, 2009, the beneficiaries renewed their “safe harbor” petition for a determination of whether their proposed petition violated the No Contest Clause of the trust. At the same time they lodged their petition, which again sought to compel a proper accounting from the Trustees, fix the compensation of the Trustees; remove the Trustees, and compel a distribution of a portion of the trust assets.
The beneficiaries alleged among other things that the accounting failed to segregate the original trust into the separate sub trusts upon the death of Rodney E. Donkin, Sr., or make distributions as required by the Trust; the accounting failed to disclose loans to the Trustees; the successor Trustees had paid themselves legal fees, although Vicki Donkin was not an attorney; the second amendment to the Trust forgave loans to Lisa Kim and Rodney Donkin, Jr., but the accounting failed to reflect such debt forgiveness.
The second safe harbor application also contained a petition to compel arbitration which was denied without prejudice on October 30, 2009.
On January 1, 2010, changes to the Probate Code eliminated the “safe harbor” provisions of section 21320, pursuant to which a party could obtain a declaration from the court prior to instituting an action that the proposed action would not violate the no contest clause of the instrument at issue.
Pursuant to these changes, a new statutory scheme governs no contest clauses. (§§ 21310–21315.)
Stats.2008, ch. 174, § 2, operative January 2010, applied retroactively to all instruments that became irrevocable on or after January 1, 2001. (§ 21315, subd. (a).)
On February 23, 2010, the Trustees filed their response to the beneficiaries' safe harbor petition, acknowledging that the law had changed and eliminated the safe harbor process. Nonetheless, they requested pursuant to section 3, subdivision (h),
that the court apply the former safe harbor provisions because the beneficiaries' pleadings had been filed under the old law. The Trustees requested that if the court should decide the new law applied, the safe harbor petition would be subject to demurrer under Code of Civil Procedure section 430.10, subdivisions (a) and (e) because the safe harbor action was not supported under the new law. The Trustees requested further time to respond to the beneficiaries' safe harbor application in order to make an argument that the old law applied.
Section 3, subdivision (h) provides that “[i]f a party shows, and the court determines, that application of a particular provision of the new law or of the old law in the manner required by this section or by the new law would substantially interfere with the effective conduct of the proceedings or the rights of the parties or other interested persons in connection with an event that occurred or circumstance that existed before the operative date, the court may, notwithstanding this section or the new law, apply either the new law or the old law to the extent reasonably necessary to mitigate the substantial interference.”
On March 5, 2010, the beneficiaries responded, reiterating their request that the court find their petition did not constitute a “contest.” The court ordered the Trustees to file a petition for instructions regarding applicability of the new law to the beneficiaries' petition.
On March 25, 2010, the Trustees filed their petition for instructions, seeking a determination that (1) the beneficiaries had violated the no contest clauses of the Trust
(2) the former no contest law should be applied pursuant to section 3, subdivision (h), and (3) a stay of the pending safe harbor application to determine whether the filing of the safe harbor application violated the no contest provisions of the Trust. The Trustees claimed that in 2004, Mary Donkin had been diagnosed with cancer, and executed the Second Amendment to the Trust on December 17, 2004 in order to clarify the Settlors' intent that the Trust not be challenged, and argued application of the new law to the Trust would substantially weaken the no contest protections in the Trust, and thwart the Settlors' intent. The Second Amendment to the Trust clarified the Settlors' directive that the Trustees have discretion when to make distributions from the Trust. Further, the Trustees contended by filing the safe harbor petition when the Trust obligated them to arbitrate, the beneficiaries had triggered the No Contest Clause, further arguing that if the beneficiaries violated the No Contest Clause, they were no longer beneficiaries and therefore had no standing to pursue a safe harbor petition.
On this point, the petition does not specify whether the old law or the new law's provisions relating to contests applied.
The beneficiaries replied that the Settlors had made provision for application to the court for assistance in interpreting the Trust instrument. They argued the no contest provision in the Trust and its amendments were limited to challenges to the Trust itself, its provisions, or asset distributions, which were not the type of challenges they were making. Thus, their safe harbor petition did not constitute a challenge to the Trust within the meaning of its no contest provisions.
On August 10, 2010, the trial court heard the safe harbor application and petition for instructions. The court announced its tentative was to find that the beneficiaries' requested relief did not violate the No Contest Clause, and deny the Trustees' petition without prejudice, noting that the “mandatory arbitration clause ... would have a priority.” The Trustees requested that the court give them more time to brief the issue of which law would apply under section 3, subdivision (h). The court concluded, without making a finding whether the former law applied, that the beneficiaries' challenge to the Trustees' actions would not constitute a contest.
On September 17, 2010, the court issued its written order stating that the beneficiaries' petition to compel a proper accounting and seeking other relief did not constitute a contest under the terms of the no contest clauses of the Trust.
DISCUSSION
Appellants contend the former no contest law should apply to this dispute based on the parties' reliance on the former law, and the proposed petition violates the no contest provisions of the Trust and the Second Amendment because it attacks the validity of the Second Amendment and therefore challenges the Trust's asset distribution scheme. Respondents contend that the old law applied to their safe harbor application, and their petition does not violate the no contest provisions of the Trust because they allege wrongful conduct by a fiduciary and seek a required distribution, and they do not seek to invalidate the Trust or its provisions.
I. STANDING
[1][2] Both parties assert standing issues. The Trustees contend the beneficiaries' failure to resort to arbitration constitutes a prohibited contest, thereby activating the No Contest Clause, divesting the beneficiaries of any interest in the Trust, and consequently their standing to contest the Trustees' actions. The beneficiaries contend that the Trustees are not aggrieved by the trial court's ruling either in their individual capacities or in their capacity as trustees because Rodney, Jr.'s interest in the Trust is affected by the outcome of the safe harbor petition; further, they contended Rodney, Jr. used his capacity as Trustee to finance his opposition to the safe harbor petition and Vicki has no beneficial interest in the Trust. We find both parties have standing.
[3] A will contest may be pursued by any “interested person,” which is defined as a decedent's spouse, children, heirs, testate beneficiaries, creditors, and “any other person having a property right in or claim against” a trust or estate that may be affected by the proceeding. (§ 48, subd. (a).) Whether a person is “interested” is determined on a case-by-case basis, with reference to the particular purpose of the proceeding and the particular matter involved. (§ 48, subd. (b).) The interest must be a pecuniary interest in the devolution of the estate that may be impaired or defeated by probate of the will or benefitted by having it set aside. ( Estate of Plaut (1945) 27 Cal.2d 424, 429, 164 P.2d 765.)
Here, the Trustees have standing to appeal in their fiduciary capacity the granting or denial of a safe harbor petition pursuant to Estate of Goulet (1995) 10 Cal.4th 1074, 1080, 43 Cal.Rptr.2d 111, 898 P.2d 425, which held that “[c]onsiderations of law and policy lead us to conclude a trustee must be permitted to appeal an order determining a trust beneficiary's proposed claim would not violate a trust's no contest clause.” Further, as the Trustees have not asserted any individual arguments, we need not consider whether Vicki, who is not a beneficiary, has standing in her individual capacity. We also conclude the beneficiaries have standing notwithstanding the Arbitration Clause in the Trust because the Arbitration Clause contains no language that it operates as an in terrorem clause if arbitration is not pursued. Rather, it states that the parties shall submit to arbitration on the written request of either party; there is no consequence stated in the Arbitration Clause for failing to submit to arbitration.
II. NO CONTEST CLAUSES
A. Law Regarding No Contest Clauses
[4][5][6] No contest clauses remain valid and enforceable in California. ( Munn v. Briggs (2010) 185 Cal.App.4th 578, 592, 110 Cal.Rptr.3d 783.) A no contest clause “essentially acts as a disinheritance device, i.e., if a beneficiary contests or seeks to impair or invalidate the trust instrument or its provisions, the beneficiary will be disinherited and thus may not take the gift or devise provided under the instrument.” ( Burch v. George (1994) 7 Cal.4th 246, 265, 27 Cal.Rptr.2d 165, 866 P.2d 92 ( Burch ).) Whether a particular proceeding constitutes a contest under a given instrument depends on the scope of the no contest clause, the circumstances of the particular case, and the language of the instrument. Thus, a proceeding which would constitute a contest under one will would be permissible under another. ( Id. at pp. 254–255, 27 Cal.Rptr.2d 165, 866 P.2d 92.)
Under the former law governing will contests (§§ 21300 to 21308, 21320–21322), a contest was defined as “direct” or “indirect.” A direct contest was any pleading that challenged the validity of a instrument based upon revocation, lack of capacity, fraud, misrepresentation, menace, duress, undue influence, mistake, lack of due execution, or forgery. (Former § 21300, subd. (b).) An “indirect” contest involved a pleading that challenged the validity of an instrument based on grounds other than those specified in section 21300, subdivision (b), and was a means of attacking the validity of an instrument by seeking relief inconsistent with its terms. ( Johnson v. Greenelsh (2009) 47 Cal.4th 598, 605, 100 Cal.Rptr.3d 622, 217 P.3d 1194 ( Johnson ); former § 21300, subd. (c).) The prior law contained a list of specified exceptions to enforcement of no contest clauses against indirect actions based upon public policy and other considerations that would violate the no contest clause. (See, e.g., former §§ 21305, 21306, 21307.) The question before the court on a section 21320 petition is not whether the proposed legal challenge will succeed on the merits. Rather, the relevant test is whether asking a court to rule on it would constitute a contest. (§ 21320, subd. (c); McKenzie v. Vanderpoel (2007) 151 Cal.App.4th 1442, 1449–1450, 61 Cal.Rptr.3d 129.)
In Burch, supra, 7 Cal.4th 246, 27 Cal.Rptr.2d 165, 866 P.2d 92, the court set forth some basic principles for determining whether a particular proposed action would violate a particular no contest clause. If the action “would effectively nullify or thwart the provisions” thereby challenging the distributive scheme of the estate plan by setting aside the core of the plan, a challenge, whether direct or indirect, would violate the no contest clause at issue. ( Id. at p. 261, 27 Cal.Rptr.2d 165, 866 P.2d 92.) In determining whether a no contest clause would be violated, the courts consider the language of the clause, other terms of the trust, and extrinsic evidence of the trustor's intent, which may include the testimony of the attorney who drafted the estate plan. (See Id. at pp. 256–260, 27 Cal.Rptr.2d 165, 866 P.2d 92.) Such intent can be determined by resort to extrinsic evidence, if necessary. ( Estate of Kaila (2001) 94 Cal.App.4th 1122, 1130, 114 Cal.Rptr.2d 865.) In general, if the beneficiary's proposed action would “effectively nullify or thwart [a] provision[ ] in the trust instrument” or “result in the nullification of [the trustor's] clearly stated intent,” the proposal “would constitute a contest within the meaning of the no contest clause.” ( Burch, at pp. 261, 263, 27 Cal.Rptr.2d 165, 866 P.2d 92; see also Estate of Pittman (1998) 63 Cal.App.4th 290, 299, 73 Cal.Rptr.2d 622 [thwarting of testator's intent determines whether no contest clause is triggered].) “Therefore, even though a no contest clause is strictly construed to avoid forfeiture, it is the testator's intentions that control, and a court ‘must not rewrite the [testator's] will in such a way as to immunize legal proceedings plainly intended to frustrate [the testator's] unequivocally expressed intent from the reach of the no-contest clause.’ [Citation.]” ( Burch, at p. 255, 27 Cal.Rptr.2d 165, 866 P.2d 92; see also Johnson, supra, 47 Cal.4th at p. 604, 100 Cal.Rptr.3d 622, 217 P.3d 1194.)
In Genger v. Delsol (1997) 56 Cal.App.4th 1410, 66 Cal.Rptr.2d 527, the decedent created an “integrated estate plan,” consisting of a revocable trust, a pour-over will and a corporate stock redemption agreement. Pursuant to the separate stock redemption agreement, his stock in a family owned corporation would be returned to the corporation in exchange for the corporation giving his wife the corporate owned house in which they had lived and forgiving certain debt he owed to the corporation. ( Id. at pp. 1416, 1423, 66 Cal.Rptr.2d 527.) The trust, in which the decedent expressed his intent for the successor trustee and his wife to take all action necessary to have the corporation redeem the stock pursuant to the redemption agreement, contained a no contest provision applicable to any trust beneficiary who “ ‘contests in any court the validity of this trust or of a deceased settlor's last will or seeks to obtain an adjudication in any proceeding in any court that this trust or any of its provisions or that such will or any of its provisions is void, or seeks otherwise to void, nullify, or set aside this trust or any of its provisions....' ” ( Id. at p. 1420, fn. 4, 66 Cal.Rptr.2d 527, italics omitted.) The decedent's spouse contended, relying on the statutory definition of section 21300, subdivision (a) that a “contest” was an attack on an instrument, challenged the redemption agreement under the theory to do so would not constitute a contest under the will's no contest clause. ( Id. at p. 1420, 66 Cal.Rptr.2d 527.) In Genger, the court rejected the wife's argument that a strict construction of the no contest clause rendered it applicable only where there was an attack on the will or trust itself, not by an attack on a separate instrument. ( Ibid.) The Genger court concluded that, in light of the decedent's intent as expressed in all three of the testamentary documents, the wife's proposed challenge constituted a contest within the scope of the trust's no contest clause despite the fact that the corporate stock redemption agreement which was not a testamentary document, was not specifically mentioned in the no contest clause itself. ( Ibid.)
In addition, effective in 2001, the legislature restricted the reach of no contest clauses by declaring that certain types of actions could never constitute a contest despite what the no contest clause provided. Former section 21305, subdivision (b), effective January 1, 2003 through December 31, 2009,
found that certain actions would not constitute a contest as a matter of public policy. Those actions included (1) a pleading challenging the exercise of a fiduciary power (former § 21305, subd. (b)(6)), (2) a pleading regarding the appointment of a fiduciary or the removal of a fiduciary (former § 21305, subd. (b)(7)), and (3) a pleading regarding an accounting or report of a fiduciary (former § 21305, subd. (b)(8)). (See Bradley v. Gilbert (2009) 172 Cal.App.4th 1058, 1069–1071, 91 Cal.Rptr.3d 680 ( Bradley ).) As explained in Bradley, “a beneficiary should be able to question the actions of a faithless fiduciary without being subject to the restrictions of [a no contest] clause: ‘[T]he Legislature has determined that in furtherance of the public policy of eliminating errant fiduciaries, a beneficiary who believes a fiduciary is engaged in misconduct should be able to bring the alleged misconduct to the court's attention without fear of being disinherited.’ [Citation.]” ( Bradley, at p. 1071, 91 Cal.Rptr.3d 680; see also Estate of Ferber (1998) 66 Cal.App.4th 244, 253, 77 Cal.Rptr.2d 774 [“No contest clauses that purport to insulate executors completely from vigilant beneficiaries violate the public policy behind court supervision”].)
Former section 21305, subd. (d) provided: “Subdivision (b) shall apply only to instruments of decedents dying on or after January 1, 2001, and to documents that become irrevocable on or after January 1, 2001.” Section 21305 was repealed effective January 1, 2010 (Stats.2008, ch. 174, § 1).
Thus, in Fazzi v. Klein (2010) 190 Cal.App.4th 1280, 119 Cal.Rptr.3d 224, the court found a challenge that sought to disqualify a successor trustee that was named in the trust on the basis the trustee was unfit to serve based upon a lack of education would violate the no contest clause because it would violate the settlors' estate plan by disturbing the decedent's choice of fiduciary, while an action to remove a trustee for cause (malfeasance) would not. ( Id. at pp. 1288–1289, 119 Cal.Rptr.3d 224.) Similarly, in Estate of Hoffman (2002) 97 Cal.App.4th 1436, 119 Cal.Rptr.2d 248, the decedent wife's principal asset was her interest in a Chevrolet dealership which was, after her husband's death, transferred to a trust and run by several of her five children. The Trust assets were to be distributed to the five children upon the wife's death, and three of the children became trustees of the trust and executors of the decedent's will. ( Id. at p. 1439, 119 Cal.Rptr.2d 248.) The decedent's will contained a blanket no contest clause providing, “if any person shall contest this Will or object to any of the provisions hereof,” such person would be entitled to the sum of one dollar in lieu of their share under the Will. ( Ibid.) Two of the children challenged the other three children's management of the dealership, alleging breach of fiduciary duties, and sought to remove them as executors. ( Id. at p. 1440, 119 Cal.Rptr.2d 248.) Estate of Hoffman held the proposed challenge was protected from the breach of the decedent's no contest clause by section 21305, subdivision (b)(7) because it sought to remove a fiduciary. ( Id. at p. 1444, 119 Cal.Rptr.2d 248.)
B. Safe Harbor Petitions Under Former Law
Under former law, section 21320 provided a “safe harbor” for beneficiaries to seek an advance judicial determination whether a proposed legal challenge would be a contest under a particular no contest clause. (Former § 21320, subd. (a); Estate of Kaila (2001) 94 Cal.App.4th 1122, 1130, 114 Cal.Rptr.2d 865.) Under former law's safe harbor procedure, if the court determined the particular challenge would constitute a contest, the beneficiary would be able to make an informed decision whether to pursue the action. ( Ibid.) Such clauses serve important public policies, including discouraging litigation and giving effect to the disposition of assets according to the testator's plan. However, because application of a no contest clause against an unsuccessful party resulted in forfeiture, they were strictly construed. ( Munn v. Briggs, supra, 185 Cal.App.4th at p. 592, 110 Cal.Rptr.3d 783.) A ruling on the beneficiary's proposed action could not involve a determination of the merits of the action itself. ( Estate of Ferber, supra, 66 Cal.App.4th at p. 251, 77 Cal.Rptr.2d 774.) In the end, “[e]ach case depends upon its own peculiar facts and thus case precedents have little value when interpreting a trust.” ( McIndoe v. Olivos (2005) 132 Cal.App.4th 483, 487, 33 Cal.Rptr.3d 689.)
However, the safe harbor provisions of the declaratory relief action under section 21320 spawned a substantial amount of litigation, insulated fraud and undue influence from judicial review, and required a cumbersome and unpredictable case-by-case analysis. ( Revision of No Contest Clause Statute (2007) 37 Cal.L. Revision Com. Reports 359, 382–383 ( Revision Report ).) Therefore, recognizing the need for reform, in 2007 the Legislature directed the Law Revision Commission to prepare a report weighing the advantages and disadvantages of no contest clauses. ( Id. at p. 363.) The Revision Report noted that policies favoring enforcement of such clauses include effectuating the transferor's intent; avoiding costly litigation, discord between beneficiaries, and protecting the transferor's privacy; and using forced elections to avoid ownership disputes of community and separate property. ( Id. at pp. 364–368.) Policies favoring nonenforcement of no contest clauses include providing access to justice and the courts; avoiding forfeitures; permitting challenges that effectuate the transferor's intent raised by issues of capacity, ambiguity and the necessity for reformation or modification; judicial supervision of fiduciaries; and abuse of forced elections regarding community property. ( Id. at pp. 369–374.) In addition, the prior law was exceedingly complex and unpredictable, leading to overreliance on the safe harbor declaratory relief action, while no contest clauses were often used to deprive spouses of community property and shield fraud, undue influence, and fiduciary wrongs from judicial scrutiny. ( Id. at p. 381.)
The Revision Report concluded that “[a] simpler approach would be to limit the enforcement of a no contest clause to a list of specified contest types. Under that approach, any pleading that is not one of the expressly covered types would not be governed by the no contest clause. No further analysis would be required. That would eliminate both the open-ended definition of ‘contest’ and as well as the lengthy (an inevitably incomplete) list of statutory exceptions.” ( Revision Report, supra, at p. 392.) Further, although the “indirect” contest was eliminated, the Law Revision Commission noted that “[e]xisting law already exempts nearly all types of indirect contests from the operation of a no contest clause.... The policy implication of that trend is clear. A beneficiary should not be punished for bringing an action to ensure the proper interpretation, reformation, or administration of the estate plan. Such actions serve the public policy of facilitating the fair and efficient administration of estates and help to effectuate the transferor's intentions, which might otherwise be undone by mistake, ambiguity, or changed circumstances.” ( Revision Report, supra, at p. 395, fn. omitted.) As a result, the new law exempts all indirect contests except for forced elections. ( Ibid.)
[7][8] As a result of the Law Revision Commission's recommendations, current law has narrowed the circumstances under which a no contest clause will be enforceable, and specifies three situations in which a no contest clause may be enforced: (1) A direct contest brought without probable cause; (2) a pleading to challenge a transfer of property on the grounds it was not the transferor's property at the time of transfer; and (3) the filing of a creditor's claim or prosecution of an action based on it. (§ 21311, subd. (a); Johnson v. Greenelsh, supra, 47 Cal.4th at p. 601, fn. 2, 100 Cal.Rptr.3d 622, 217 P.3d 1194.) A “direct” contest under the new law is a challenge based upon forgery, lack of due execution, lack of capacity, menace, duress, fraud, undue influence, or revocation. (§ 21310, subd. (b).) “There should be no ambiguity about whether a contest is a direct contest. The grounds for a direct contest would be limited and clear.” ( Revision Report, supra, at p. 393.) The new no contest provisions of the Probate Code no longer define “indirect” actions. The Probate Code provisions governing no contest clauses do not supplant the common law, which governs to the extent the statutes do not apply. (§ 21313.)
[9] Thus, for an instrument that became irrevocable on or after January 1, 2001, the no contest clause is thus enforceable against a direct contest unless it is brought without probable cause. (§ 21311, subd. (a).) A direct contest is a pleading filed by a beneficiary that alleges the invalidity of the protected instrument or one or more of its terms on the basis of forgery; lack of due execution; lack of capacity; menace, fraud, or undue influence; revocation of a will (§ 6120) or a trust (§ 15401); or disqualification of a beneficiary under sections 6112, 21350, or 21380. (§ 21310, subd. (b).)
“[P]robable cause exists, if at the time of filing of a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.” (§ 21311, subd. (b).) The comment to section 21311 states that “reasonable likelihood” means “less than more probable than not” as set forth in Alvarez v. Superior Court (2007) 154 Cal.App.4th 642, 653, footnote 4, 64 Cal.Rptr.3d 854 (construing Penal Code § 938.1), and People v. Proctor (1992) 4 Cal.4th 499, 523, 15 Cal.Rptr.2d 340, 842 P.2d 1100 (construing Penal Code § 1033). (Cal. Law Rev. Com. com., West's Ann. Prob.Code (2011 ed.) foll. § 21311, pp. 209–210.)
III. THE FORMER LAW APPLIES
[10] Section 3 governs changes to the Probate Code, and provides that the old law continues to apply to any paper filed or action taken before the operative date that was proper at the time the action was taken. (§ 3, subds. (d)–(g).) In addition, if a party shows and the court determines that application of a particular provision of the new law or of the old law in the above manner “would substantially interfere with the effective conduct of the proceedings or the right of the parties or other interested persons in connection with an event that occurred or circumstance that existed before the operative date, the court may ... apply either the new law or the old law to the extent reasonably necessary to mitigate the substantial interference.” (§ 3, subd. (h).)
The Law Revision Commission comments to section 3 note that “[b]ecause it is impractical to attempt to deal with all the possible transitional problems that may arise in the application of the new law to various circumstances, subdivision (h) provides a safety-valve that permits the court to vary the application of the new law where there would otherwise be a substantial impairment of procedure or justice. This provision is intended to apply only in the extreme and unusual case, and is not intended to excuse compliance with the basic transitional provisions simply because of minor inconveniences or minor impacts on expectations or other interests.” (Cal. Law Rev. Comm. com., West's Ann. Prob.Code (2011 ed.) foll. § 3, p. 11.) “The Commission's official comments are deemed to express the Legislature's intent.” ( Fair v. Bakhtiari (2006) 40 Cal.4th 189, 195, 51 Cal.Rptr.3d 871, 147 P.3d 653.)
[11] Section 3, subdivision (c) expresses the Legislature's intent that amendments to the Probate Code apply on their effective date regardless of prior events, with limited exceptions. (§ 3, subd. (c); Guardianship of Ann S. (2009) 45 Cal.4th 1110, 1137, 90 Cal.Rptr.3d 701, 202 P.3d 1089.) The provisions of section 3, subdivision (h) allow “a party affected by a new statute to show why, under the circumstances presented, justice requires the application of former law.” ( Guardianship of Ann S., supra, 45 Cal.4th at p. 1137, 90 Cal.Rptr.3d 701, 202 P.3d 1089.) “In weighing such a claim, we consider ‘the significance of the state interest served by the law, the importance of the retroactive application of the law to the effectuation of the that interest, the extent of reliance upon the former law, the legitimacy of that reliance, the extent of actions taken on the basis of that reliance, and the extent to which retroactive application of the new law would disrupt those actions.’ [Citations.]” ( Id. at p. 1138, 90 Cal.Rptr.3d 701, 202 P.3d 1089.)
We conclude that the trial court did not abuse its discretion in determining the former law applies. The Settlors' estate plan contained numerous no contest clauses and an Arbitration Clause that evidenced an intent that the beneficiaries avoid litigation with each other and the successor trustees, and thus the Settlors' extensive reliance on prior law is evident. The policy of minimizing costly litigation to the estate will not be served by applying the new law because the beneficiaries would still be obligated, under the new law, to withstand a determination whether their petition was brought with “probable cause.” Requiring the beneficiaries to undergo a probable cause determination on remand when we are able to find that the old law applies to their petition conserves the Trust's resources. Finally, applying the new law would penalize the beneficiaries for following the law in effect at the time the petition was filed and place them unnecessarily at risk, resulting in an injustice that we can avoid by applying the former law.
IV. CERTAIN OF THE BENEFICIARIES' CHALLENGES CONSTITUTE A CONTEST UNDER THE TRUST AND SECOND AMENDMENT; OTHERS REQUIRE REMAND FOR A FULL DETERMINATION IN THE TRIAL COURT
Here, the Trustees requested the trial court to permit them to fully brief the matter of whether the old law applied, and whether on the merits the beneficiaries' challenges violated the Trust's no contest clauses. In some instances, we are able to determine as a matter of law that the proposed challenges would violate the no contest clauses of the Trust and Second Amendment; with respect to other challenges, because the trial court did not conduct a full hearing, we remand the matter to the trial court for a full determination, after briefing by the parties should the beneficiaries choose to bring another safe harbor petition, of whether such challenges trigger the no contest provisions of the Settlors' instruments.
[12][13] We conclude that as a matter of law, the beneficiaries' challenges to Mary's ability to amend the Trust with the Second Amendment, the Trustees' failure to make distributions, and Mary's failure to create the subtrusts required by the Trust would, if pursued, constitute a contest under the no contest clause because these challenges attack the distributive scheme of the Trust by requiring the Trustees to exercise their discretion when they are not required to do so by the Second Amendment. The beneficiaries' contention that the Second Amendment does not apply to the Trust because the surviving Settlor (Mary) lacked to the power to amend the Trust also constitutes a challenge to the distributive scheme of the Settlors. As the case law demonstrates, each case depends upon its particular facts and the no contest clauses at issue. There may be other elements of the beneficiaries' challenges, if pursued by the beneficiaries, that would trigger the no contest clauses of the Trust and Second Amendment, but we leave such a determination to the trial court on remand.
DISPOSITION
The order is affirmed to the extent that the trial court determined the former law governing will contests and safe harbor petitions applied, and is otherwise reversed. The parties are to bear their own costs on appeal.