United States: Navigating In Terrorem Clauses: Guidance From Hallett v. Hallett

Published in NH Bar News
(3/20/2017)

Testamentary in terrorem provisions, which compel forfeiture by a legatee upon unsuccessful challenge to the validity of an estate plan and/or its administration, have a rich history, with antecedents in the ancient world, and in English and American case law, as far back as 1674 and 1898, respectively.

In New Hampshire, "[t]he general rule is well established that a beneficiary who contests the will will forfeit his share in accordance with a provision in the will therefore," according to Burtman v. Butman (NH, 1952). In often identical language, RSA 564-B:10-1014 for trusts and RSA 551:22 for wills mandate the enforcement of the intent "as reflected in a no-contest provision... to the greatest extent possible," and "without regard to the presence or absence of probable cause for, or the beneficiary's good or bad faith."

Those statutes exempt from enforcement: "[a]ny action to determine whether a proposed or pending motion, petition, or other proceeding constitutes a contest within the meaning of a no-contest provision," and "[a]ny action brought by a beneficiary or on behalf of any such beneficiary for a construction or interpretation of the terms of the trust [or will]."

In the case of an action contesting the validity of a will or trust, "[a] no-contest provision shall be unenforceable to the extent that the [instrument] is [determined to be] invalid... [and] [i]n the case of an action... to challenge the acts of the [fiduciary]..., a no-contest provision shall be unenforceable to the extent that the [fiduciary]... has committed a breach of fiduciary duties or breach of trust," according to state statutes.

Counsel representing a beneficiary contemplating an action to contest the validity or the fiduciary's administration of a trust or will needs to advise the client carefully about in terrorem risks. The decisions of Judge Gary Cassavechia in Hallett v. Hallett provide important guidance on:

  1. The extent to which the Court will provide instruction as to whether an action constitutes a "contest" under an in terrorem clause;
  2. Whether the Court will provide guidance as to the risks of forfeiture if the beneficiary succeeds on less than all claims;
  3. Whether conducting discovery irrevocably commits a beneficiary to having engaged in a contest.

In Hallett, children of the settlor, as beneficiaries of family and marital sub-trusts (the "Beneficiaries"), contended that the two trustees (the settlor's surviving spouse and settlor's former counsel), (the "Trustees"), committed various breaches in the administration of the trusts. The trust contained the following broad in terrorem clause:

"Contest of Will or Trust. It is the Grantor's will and direction that if any beneficiary under this Trust... or any other person, shall, directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the... administration of this Trust, or any amendment hereto, or impair, invalidate or set aside the same, or any of their provisions, then, in such event, the provision herein made for the benefit of such person or persons shall thereupon be revoked. Such person or persons shall thereafter be excluded from any participation in this Trust and shall, thenceforth, have no right, title or interest in the assets of this Trust. Any property, devise, bequest or distribution to such person or persons shall thereafter pass as if such person or persons did not survive the Grantor." (Emphasis added.)

Thus, the trust mandates forfeiture in the event a beneficiary "shall, directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the... administration of this Trust." As the Court stated in its Jan. 15, 2014 order (the "First Safe Harbor Order"), "[t]his language manifests an intention of the settlor to discourage provocations impugning even mere acts of or, presumably inclusively, omissions in administration."

Mindful of this prohibition, the Beneficiaries in count I of their 11-count petition and a "Motion for a Ruling on the Safe Harbor Provision of NH RSA 564-B:10-1014" sought a ruling that the filing of their action did not constitute a contest in violation of the in terrorem clause. In a supplemental filing, the Beneficiaries sought "additional court orders that the no-contest provision... is unenforceable: 1) 'to the extent... the trust is invalid because of fraud [or] violates public policy;' [and] 2) 'because the fundamentals of [their] action solely challenge the acts of the Trustees as... breach[es] of [their] fiduciary duties...,'" according to the order.

"Given that the Co-Trustees have seasonably objected and indicated an intent to disprove the allegations," the Court held that it could give guidance under RSA 564-B:10-1014c)(3) as to which claims in the petition were contests within the meaning of the in terrorem provision, but could not give guidance until after a trial as to whether forfeiture would be imposed if the contests were pursued. "Put another way, the Hallett Beneficiaries may only find statutory sanctuary from the no-contest provision after they successfully prove, to the measure needed, what they have alleged." The Court went on to recognize "that the journey to these safe harbors is necessarily fraught with risk for a litigant, as actual invalidity of the trust, or breach of duty by a trustee cannot be determined in advance of completed litigation."

Reviewing the petition, the Court held that all of the counts, other than the request for the advisory order, amounted to in terrorem contests, including those which were wholly remedial and sought modification of the trust, enforcement of the no-contest provision against the surviving spouse as beneficiary, and an award of attorneys' fees and costs, reasoning that to the extent that these claims sought limitations on the Trustees' discretion, they sought to interfere with the administration of the trust and were contests under the in terrorem clause. The Court granted the Beneficiaries leave to amend their petition in light of the Court's rulings.

As set forth in the Court's March 31, 2015 order (the "Second Safe Harbor Order"), the Beneficiaries filed an amended petition and motion asking the Court to rule: "(a) that successful prosecution of one 'contest'... makes the no-contest clause unenforceable against the entire action; (b) the no-contest clause [does not apply]... because [the] an action seek[s] construction of the terms of the... Trust...; and (c) none of the allegations contained in the Amended Petition constitutes a 'contest' within the terms of [the in terrorem clause]." (Second Safe Harbor Order)

Noting that "the Court has [not] been able to find case law on point" with regard to whether a single favorable ruling on the beneficiaries' breach of fiduciary claims would be enough to protect them from forfeiture if they lost on their other claims, Cassavechia considered the purpose of the statute and the reasonable expectations of the settlor and ruled that this determination may be made only after a trial.

The Court rejected the Beneficiaries' attempt to characterize their action as falling under RSA 564-B:10-1014(c)(4), which exempts from in terrorem enforcement "[a]ny action brought by a beneficiary... for a construction or interpretation of the terms of the trust," reasoning that trust interpretation was not in fact the purpose of their claims.

Consistent with its rulings on the original petition, the Court found that all claims in the amended petition were contests, including a remedial claim for attorneys' fees. At the request of the Trustees, the Court ruled that it would not permit further amendments to the petition and that it would not entertain any further pre-trial requests for in terrorem guidance.

Citing that the Beneficiaries had engaged in discovery, including interrogatories, document requests, and expert disclosures, the Trustees urged the Court to find that the Beneficiaries had pressed the litigation sufficiently to constitute an in terrorem contest, which the Beneficiaries could not escape by withdrawing the action. In evaluating the issue, the Court balanced the plain meaning of the trust in terrorem clause and RSA 564-B:10-104, which it noted "arguably" supported the Trustee's request, against the fact that the underlying intent of the in terrorem clause would be furthered by encouraging the Beneficiaries to drop claims upon conducting discovery that reveals their lack of merit, and New Hampshire's public policy favoring "open and complete discovery." (citing NH Ball Bearings v. Jackson (2009)).

In light of these competing considerations, the Court adopted the approach of the New York Surrogate's Court "allowing limited discovery, based on the facts of each case, that would provide a beneficiary with 'information of potential value or relevance' in order to make a determination that the trust is being administered in accordance with a settlor's intent." (citing In re Baugher (Surrogate's Ct. Nassau Cty. 2010)). Finding that the "Hallet Beneficiaries' discovery activities to date have remained, on balance, within the realm of acceptable inquiry consistent with determination whether the R.S. Hallett Trust had been administered in a manner intended by the Settlor," the Court "decline[d] the Co-trustee's invitation, at this time, to find the Hallett Beneficiaries in violation of Article 13 [of the Trust]."

After these extensive preliminary proceedings, the Beneficiaries proceeded with their claims and ultimately prevailed at trial before Judge Cassavechia, as Referee, whose June 16, 2016 "Recommendation" was approved by Judge Robert Foley by a June 17, 2016 order. In that order, the Court found that the Trustees breached their duty to timely fund sub-trusts, their duties of impartiality and loyalty by managing trust investments to favor the interests of the lifetime beneficiary (the widow Trustee) over the interests of the residuary beneficiaries, and the duty to segregate trust assets. While the petitioners successfully proved multiple breaches of duty and obtained removal of the Trustees, the monetary relief awarded was modest. The Court found that it could not reasonably ascertain fair compensable damages based on the evidence presented. In view of the success on the merits of their claims, the Court found that the petitioners were entitled to safe harbor from enforcement of the trust's in terrorem provision under RSA 564-B:10-1014(b).

In terrorem provisions are increasingly common in estate plans and pose a significant risk for any beneficiary contestant who is to receive interests of value under the estate plan. Although decided under RSA 564-B:10-1014, which governs trusts, Hallett is likely to be followed by the Probate Court in considering an in terrorem provision in a will. Hallett offers the following lessons:

  1. The Probate Court will give guidance as to whether a proposed action constitutes an in terrorem "contest," but will likely decline to offer any guidance until after trial as to the extent to which a contestant's claims must be proved in order to avoid forfeiture, including whether success on any single claim may be enough.
  2. While the Court is likely to permit at least one amendment of a proposed action in light of the Court's preliminary guidance as to whether it constitutes a contest, the Court is unlikely to permit serial amendments.
  3. The mere fact that resolution of a claim may require the Court to construe the will or trust will not exempt the action from being a contest under RSA 564-B:10-1014(c)(4) or RSA 551:22, III(d); rather, the Court will look to the substance of the claim in light of the meaning of the in terrorem clause and the applicable statute.
  4. The Court is likely to permit some preliminary discovery before finding that an in terrorem contest has been irrevocably begun, but how much is too much discovery will depend on the facts of a given case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions