Friday, October 30, 2009
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California Supreme Court Rules:
Challenge to Settlor’s Capacity Did Not Violate No-Contest Clause
By KENNETH OFGANG, Staff Writer
A trust beneficiary’s demand for arbitration of a dispute with a fellow beneficiary and co-trustee was not a contest of the terms of the trust, the California Supreme Court ruled yesterday.
In a unanimous decision, the justices reversed the contrary ruling of this district’s Court of Appeal, which held that Kathryn A. Greenelsh had violated the no-contest clause by seeking to arbitrate several claims against Robert L. Johnson.
Because the underlying dispute was based on the settlor/co-trustee’s mental capacity to take certain actions under the trust, it did not meet the statutory definition of a contest, Justice Carol Corrigan wrote.
Greenelsh and Johnson are putative co-trustees of the Warren Family Trust, which was established by Walter Warren and his wife Florence in 1993, three years before Walter Warren’s death. Walter and Florence Warren, Greenelsh, and her brother William Warren were the original co-trustees, with William Warren, Greenelsh, and Johnson—Florence Warren’s son by a previous marriage—named remainder beneficiaries.
With Walter Warren’s death in 1996 and his son’s seven years later, Florence Warren and Greenelsh became the sole co-trustees. Five days after William Warren died, Florence Warren signed a document naming Johnson as her successor co-trustee.
Shortly thereafter, Florence Warren notified the trustees that she had exercised her right to withdraw certain trust property for distribution to herself.
‘Safe Harbor’ Petition
In January 2005, Greenelsh brought a Probate Code Sec. 21320 “safe harbor” petition in San Luis Obispo Superior Court, seeking a determination that she would not be violating the trust’s no-contest clause by filing a petition to compel arbitration of “various disputes...between petitioner and Robert Johnson regarding his erroneous claims of authority as a trustee or co-trustee.”
Greenelsh, in reply to Johnson’s opposition, attached two letters from neurologists, one with a 2001 date and the other with a 2004 date, questioning Florence Warren’s capacity. The latter doctor opined that the 90-year-old Warren likely had Alzheimer’s disease “with evolving neurobehavioral disorder including hallucinosis and generalized anxiety disorder.”
The petition was denied without prejudice on the ground the petitioner had not adequately identified the disputes to which the petition applied, so that the court could not determine whether the no-contest clause applied or not. In her second petition, filed in June 2006, she sought to be declared sole trustee, arguing that the actions taken by her mother in 2003 were of no effect due to lack of capacity.
She noted that her mother had named her and her brother William Warren as attorneys-in-fact following their father’s death, and that the trust provided that if any trustee became disabled, each of the remaining trustees could act “as if he or she were the sole trustee.”
Right to Appoint
Johnson responded that the proposed petition would violate the no-contest clause by denying the surviving settlor the right to appoint a successor trustee. After the petition was denied, Greenelsh served Johnson with a notice of arbitration, alleging that there were numerous disputes between the parties, including Johnson’s status as successor trustee, that were subject to the trust’s arbitration clause.
Johnson then petitioned the court to enforce the no-contest clause against Greenelsh, who then sought to withdraw the notice of arbitration. Judge Martin Tangeman, however, ruled that the no-contest clause had been violated and that Greenelsh had lost her right to any distribution from the trust.
Div. Six of the Court of Appeal affirmed, reasoning that the arbitration demand “directly attacks provisions of the Trust in an attempt to change Walter and Florence’s testamentary plan and, accordingly, directly contravenes the express language of the no contest clause.”
Corrigan disagreed, explaining.
“Here, the Court of Appeal overstated the effect of Greenelsh’s challenge to Florence’s mental capacity. Greenelsh did not propose to ‘void, nullify, [or] set aside [the] Trust or any of its provisions,’ or to ‘change provisions which are clearly and unambiguously expressed,’ as specified in the no contest clause.”
The justice continued:
“She sought no revision of trust terms, and made no claim that the trust did not authorize Florence to appoint a successor trustee or withdraw assets from the survivor’s trust. Greenelsh asserted only that Florence had become incompetent to perform those actions, so that the appointment and withdrawal in 2003 were ineffective. The trust provisions governing appointment of trustees and withdrawal of assets would themselves remain unchanged and in full effect whether or not Greenelsh succeeded in her challenge. Were Florence to be found incompetent, her powers of appointment and withdrawal could be exercised on her behalf by her legal representative or representatives. Nothing in the no contest clause indicates it was intended to apply to proceedings to determine a settlor’s mental capacity to exercise rights conferred by the trust document.”
The case is Johnson v. Greenelsh, 09 S.O.S. 6323.
Copyright 2009, Metropolitan News Company