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Friday, July 15, 2011

Does Equity Really Abhor a Forfeiture? Recent In Terrorem Litigation

Author:
Joseph L. Bierwirth, Jr., Esq., Hemenway & Barnes LLP

Two recent cases, one in Massachusetts and one in New Hampshire, involve application of no-contest (or in terrorem) clauses to trust and estate litigation. In these types of cases, courts are called upon to balance two conflicting, long-standing principles. Leaning in favor of enforcement is the maxim central to most trust and will interpretation -- that the intent of the testator or grantor shall be given effect. Tilting against enforcement is the principle that equity does not favor a forfeiture. Most jurisdictions try to tread the middle path, finding such clauses to be enforceable but construing them narrowly or allowing post-mortem litigation without fear of forfeiture only if brought in good faith and with probable cause. As always in the law, God is in the details; cases rise and fall on the particular facts at play. The two recent cases, Savage v. Oliszczak, 77 Mass. App. Ct. 145 (2010) and Shelton v. Tamposi, Case No. 31602997-EQ-2109, Hillsborough County Probate Court (August 2010), add to the body of law exploring this balance of interests and should be known by all attorneys representing beneficiaries and fiduciaries in court proceedings.

The Savage case is, in a sense, fairly straightforward. The parties were the adult children of Georgenia Hatch, who died leaving a will and trust. The will identified the trust as the sole beneficiary of Georgenia's estate; the trust, in turn, contained dispositive provisions and an in terrorem clause as follows:

If any person, including a beneficiary, other than me, shall in any manner, directly or indirectly, attempt to contest or oppose the validity of this agreement, including any amendments thereto, or commences or prosecutes any legal proceedings to set this agreement aside, then in such event such person shall forfeit his or her share, cease to have any right or interest in the trust property, and shall be deemed to have predeceased me.
After Georgenia's death, the executors named in her will filed a petition to probate the will. Thereafter, three of Georgenia's children each filed an affidavit of objections to allowance of the will, asserting that Georgenia lacked testamentary capacity and was unduly influenced to execute the proffered will. After a year of litigation, the objections were withdrawn. The plaintiff trustees brought an action in the probate court for a determination that the will contest, although aborted, constituted a challenge sufficient to trigger the in terrorem provision in the trust. The probate judge entered an order finding no violation of the no-contest clause and the trustees appealed.

The trustees argued that a pour-over will and trust should be read as an integrated estate plan, Clymer v. Mayo, 393 Mass. 754, 766 (1985), and therefore the challenge to the will necessarily implicated the no-contest clause in the trust. After all, if the will were voided, then the trust would not have been funded and its dispositive provisions (incorporating Georgenia's plan for distribution of her wealth) would have been thwarted. The Appeals Court, however, disagreed. In the court's view, the trust had independent legal and financial significance -- the trust could have been funded during Georgenia's lifetime or received non-probate assets upon her death, such as by designation as the beneficiary of a life insurance policy. The court further noted that the purpose of an in terrorem clause is to deter challenges to a will. In this case, given that the clause was contained in a trust instrument which was not required to be publicly filed, it could have no deterrent effect on a challenge to the will; not to mention that it would be unfair to require forfeiture when it was not certain from the record whether the trust beneficiaries had notice of the no-contest clause in the trust before launching their will contest. In the end, the Appeals Court recited the black-letter law that no-contest clauses are legally valid and enforceable in Massachusetts, but held that the defendants' challenge was simply directed to the will not the separate trust.

The New Hampshire case produced a far different result. The case involved a trust created by Samuel Tamposi, a prominent New Hampshire real estate developer, for the benefit of his six children and future generations. Mr. Tamposi died in 1995, leaving over $20 million in trust comprised mostly of various business and real estate interests in New Hampshire and Florida. He named two of his sons, Sam Jr. and Stephen, as "investment directors" for the trust, a position authorized by the New Hampshire Uniform Trust Code (called a "trust advisor" in the Code). In his trust instrument, Mr. Tamposi indicated his strong desire that his hand-picked investment directors have authority to retain the family business and real estate interests in the trust, even if these assets constituted an inordinate proportion of overall trust investments.

Trouble began not long after Mr. Tamposi's death when two of the Tamposi children, including Betty Tamposi, objected to proposed actions by the trustee. Petitions for declaratory judgment were filed and, after five years of litigation and mediation, the parties reached a Settlement Agreement making certain reformations to the trust. The Settlement Agreement was approved by the probate court in February 2007. But peace did not last long -- Betty filed new litigation against her brothers in October 2007 after they refused to release "$2 million in seven days" to the beneficiaries, as demanded in a letter from Betty's trustee.

In her complaint, Betty presented a laundry list of claims. The trial was protracted, with numerous lay and expert witnesses, and 556 exhibits entered into evidence. Betty alleged a variety of breaches of fiduciary duty; the first claim was for her brothers' purported failure to defer to the direction of the trustee of Betty's subtrust (the main Tamposi trust having been divided into subtrusts for each of the Tamposi children). According to Betty, the role of investment director was subsidiary to that of trustee - in her view, once her trustee demanded funds to be made accessible, the investment directors were obliged to liquidate assets to fund the request. The court, however, found that Mr. Tamposi intended to grant to his investment directors "unequivocal authority to make investment decisions and rendered their decisions neither reviewable or reversible by the trustee." In a similar vein, the court rejected Betty's claim that the investment directors failed to appropriately invest assets to ensure sufficient liquidity. The court noted that Mr. Tamposi expressed a preference for his sons to maintain the family business and that they had properly done so, creating "substantial annual income and long-term growth for the current and future beneficiaries." In like manner, the court found against Betty on her remaining claims and emphasized that Sam Jr. and Stephen had done nothing but fulfill their father's clear plan that the family business would continue, managed by the investment directors for the benefit of all the Tamposi children equally.

Evidently frustrated by their sister's continued demands and litigation efforts, the defendants requested that the court find her in violation of the in terrorem provision contained in the trust:

If any person shall at any time commence or join in the prosecution of any proceedings in any court or tribunal…to have…this trust…set aside or declared invalid or to contest any or all of the provisions included in…this trust…or to cause or to induce any other person to do so, then and in that event such person shall thereupon forfeit any and all right, title and interest in or to any portion of this trust, and this trust shall be distributed in the same manner as would have occurred had such person died prior to the date of execution of this trust.
In analyzing the effect of this provision in light of Betty's pursuit of the litigation, the court concluded that the lawsuit in essence contested several express provisions of the trust. The court found that Betty was fully aware of her father's intentions and the degree of authority he conferred on the investment directors to implement his strategy for his trust -- by challenging these provisions, Betty acted in bad faith. As a result, the court found that the in terrorem clause had been violated and ruled that Betty had forfeited her right, title and interest in the trust, citing cases from other jurisdictions where a no-contest clause in a trust was enforced. Tumminello v. Bolten, 873 N.Y.S. 2d 731, 732 (NY 2009) and Ackerman v. Genevieve Ackerman Family Trust, 908 A.2d 1200, 1204 (DC 2006).

The court next addressed the timing of Betty's forfeiture. The language of the trust indicated that forfeiture would occur at the time legal proceedings were commenced: "If any person shall…commence…proceeding in any court…then and in that event such person…shall thereupon forfeit…" Thus, the court ruled that the forfeiture dated back to 2007 and ordered Betty to reimburse the trust for all distributions received by her after the date of the filing of the original complaint, amounting to millions of dollars.

Would a Massachusetts court reach the same result? The legal principles accepted in each jurisdiction appear similar, though the Tamposi judge expressly noted in his opinion that "probably no jurisdiction has stood more steadfastly for giving effect to the intention of the testator rather than arbitrary rules of law than New Hampshire," quoting Burtman v. Burtman, 97 N.H. 254, 257 (1952). On the planning side, the cases highlight (once again) the need to pay particular attention to drafting with broad language and including no-contest provisions in both will and trust, if that is the client's intent. From a litigation perspective, plaintiff’s counsel should be particularly aware of the risks involved in pursuing litigation in the face of a strong in terrorem provision, and counsel for fiduciaries should recognize the willingness of the courts to enter remedial orders under the right circumstances.