This is the second in a three-part series of blog posts on “no contest” clauses. In this post, I’ll discuss some of the key points in the recent Virginia Supreme Court ruling (777 S.E.2d 870) in the Rafalko case relating to no contest clauses. In part three, I’ll discuss some of the key points in the dissenting opinions.
In Rafalko, the Virginia Supreme Court confronted the issue of whether certain actions violated a trust’s no contest clause. The facts and procedural history of the case are lengthy and detailed, so in my discussion below I’ve only highlighted some of the essential facts. Here are the key takeaways from the 4-3 majority opinion.
First, the Virginia Supreme Court held that discourse relating to a challenge of a trust containing a no contest clause does not trigger the no contest clause itself. In the Rafalko case, one of the two party-plaintiffs (trust beneficiaries who filed a declaratory judgment action) wrote a letter to the trustee stating that the deceased’s estate planning documents “will be the subject of a contest” and asking the trustee to terminate the trust pursuant to a nonjudicial settlement agreement whereby the plaintiffs would receive immediate distributions (compared to distributions only after the income beneficiary passed away). One of the party-plaintiffs also wrote to the attorney who drafted the trust, asking him to preserve documents relating to the deceased’s estate plan in anticipation of a legal challenge. The trustee claimed that such conduct triggered the trust’s no contest clause, which prohibited any beneficiary from “directly or indirectly . . . challenging[ing] or contest[ing] this trust agreement or any of its provisions, or . . . in any way attempt[ing] to interfere with the administration of this trust . . .”
The Virginia Supreme Court held that the “no contest clause in this case does not prohibit discourse related to proposed conduct, even if actually undertaking that conduct would be prohibited.” The Court reasoned that it must strictly construe the no contest clause, such that it only prohibited “actual attempts to interfere with the administration of the trust.” Examining in detail the actions of the plaintiffs, the Court concluded that their actions in sending the correspondence did not trigger the no contest clause.
This new ruling will help bring clarity to pre-litigation jockeying that is somewhat common in the context of estate disputes. Estate litigators tread very carefully when wills and/or trusts contain no contest clauses, and this new ruling clarifies that communications relating to potential challenges to wills and/or trusts would not trigger a similarly drafted no contest clause. This ruling should embolden potential challengers to more aggressively assert their positions prior to litigation. Interestingly, it may actually end up aiding in the resolution of estate disputes prior to litigation, because the potential challenger will be more empowered to advance his position and theory of the case (which could result in a pre-litigation settlement once the trustee has considered the merits of the challenger’s position), compared to the challenger simply moving forward with filing suit (after having considered the cost-benefit analysis to instituting a challenge of a will and/or trust containing a no contest clause).
In Rafalko, the Virginia Supreme Court also dealt with the issue of whether a no contest clause, which was added by amendment to a trust, and which referenced “this trust agreement,” applies to any prior, pre-amendment versions of that trust. The issue arose because the correspondence by the plaintiff relating to a trust contest referenced a prior version of the trust (that did not contain the no contest clause) that the plaintiff was unaware was amended by the settlor prior to his death. As a result, the plaintiff argued that he had not “challenged” the trust containing the no contest clause because even if his correspondence constituted a “challenge,” it was not directed to “this trust” (i.e., the trust with the no contest clause).
The trial court held that by the settlor using the language “this trust agreement,” he meant the trust as amended by the trust amendment adding the no contest clause, as opposed to a prior pre-amendment version of the trust. On appeal, the Virginia Supreme Court ruled that the trustee did not properly assign error to this holding of the trial court, and that therefore the Virginia Supreme Court would not consider the issue. The two dissenting opinions both took issue with this aspect of the majority opinion, and I’ll discuss their arguments in my next post. Accordingly, this aspect of Virginia law remains rather unsettled. As things currently stand, we have a circuit court opinion holding that a reference in a no contest clause to “this trust agreement” does not apply to a challenge to a prior pre-amendment version of the trust; we have 3 of the 7 Virginia Supreme Court justices who have held in dissent that such would apply to a challenge to a prior pre-amendment version of the trust; and we have 4 of the 7 Virginia Supreme Court justices who declined to consider the issue due to what they ruled to be a failure to properly assign error to such. It will be interesting to watch this issue unfold in future litigation.